Prepay speeds are critically important for all asset classes, not just mortgage loans. As we approach year-end, we are now getting an influx of auto loan servicing portfolios for annual valuation. Fortunately, prepayments of auto loans are more predictable than prepays on mortgage loans. Interest rate fluctuations play a very little role in prepay propensity. Rather, age of loan seems to be the predominant driver.

Studies by Wall Street vendors of asset backed securities confirm that auto pools are relatively immune to interest rate arbitrage by the borrowers. That is, as interest rates rise or fall, auto loan borrowers tend to prepay at fairly consistent speeds. Because of auto loans’ short term and low loan balance compared to mortgages, they are relatively unaffected by prevailing interest rates. And, refis are difficult because the value of the vehicle usually falls faster than the loan balance. Most prepayments of auto loans occur because the vehicle was sold, traded in, or demolished - all of which are relatively independent of market rates. 

However, prepay speeds are highly correlated with loan age, with the older portfolios having a higher prepay speed than the newer portfolios. This contention is supported by actual data gathered by L1a over the years. As can be seen below, modeled prepayment speed projections (blue line) for the loans have been vectored by loan age. Actual prepays speeds (yellow line) in auto loan portfolios we are valuing show a very high correlation (95%) with modeled.

Get in touch with us - we will value your auto loan (and other consumer loan) portfolio. Let us put that data to use for you. Why guess, when you can be right?