In this paper, we consider the increasing prevalence of long term loans and use the AutoCycle™wholesale price forecasts to uncover equity held by the borrower under different economic scenarios.
We find that standard 60-month loans yield substantial amounts of equity at all points in time under realistic assumptions regarding interest rates. Though equity is reduced by the onset of a deep recession (S4), we find that the cars still have positive value at all times. Under 96-month loans, however, we find that equity rises glacially under baseline economic assumptions. Under S4, these loans are found to be underwater for a significant amount of time.This makes losses more likely for lenders.
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