Bad News for Finance Company Means Good Deals on Used Cars

Following financial news is about as invigorating as watching cantaloupe ripen, which is why the vast majority of us don’t include it as a regular pastime.

Financial developments, though, can have lasting impacts on our lives and affect the ease with which we buy houses, cars, and other items that typically require financing. Trends in the automotive finance industry can also provide a glimpse into the future of car prices and help us find the perfect timing for purchasing a new or used car.

With that in mind, we have some interesting news to share from Ally Financial, formerly GMAC, that might be good news for used-car shoppers who love to take home a great deal.

The news is not so great if you’re an automaker, a dealership, or the CEO of Ally.

The St. Louis Post-Dispatch said,

Ally Financial Inc. on Tuesday lowered its profit forecast for 2017 in the latest sign that automakers’ heavy discounting and aggressive use of leasing has created a supply glut that is hurting lenders and rental-car companies.

Earnings may increase as little as 5 percent this year, Detroit-based Ally said, a significant downward revision from CEO Jeffrey Brown’s prediction in January of growth “shy of 15 percent but still very solid.”

What does this mean?

Here’s the short version: For the last few years, more people have been opting to lease new cars to take advantage of lower monthly payments. The surge in leases translates to increases in the number of new cars leaving lots. That looks great for sales numbers, but it also means more cars coming onto the used market once the leases expire. That’s where the trouble begins.

More supply drags down prices on used cars, which hurts automakers because it also means lower residual prices on new leases. Lower prices hurt finance companies, because the collateral on loans becomes less valuable and there’s a smaller recovery on loans that go into default.

It’s in the best interest of automakers and finance companies to keep those residual values high. From the consumer’s perspective, though, falling prices are great news.

Ally saw a 7 percent slip in used-car values in the first quarter of this year. For used-car buyers that could translate to a discount of a couple thousand dollars on a $25,000 car. Plus, depending on the make and model of the car, buyers will face a plentiful selection and be able to shop multiple dealers in their quest for the deal of a lifetime.

When will you buy your next car?

-tgriffith

Find Certified Pre-Owned Cars and Used Cars in your area at CarGurus.

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