Vehicles depreciate in all sorts of ways, something lenders should know as they toggle to aggressive or conservative positions.

That is the message of a new Black Book White Paper, “Not All Vehicles Depreciate Alike.”

It highlights tracking trends, with an emphasis on how understanding historical valuation patterns can help auto lenders find the right level of portfolio risks for financing and refinancing.  

It also can help them determine when to limit or adjust the balance of a certain vehicle in the portfolio, based on trends and projected future performance of the vehicle values.

This is a key element in the orientation process, particularly since post-recession lenders once again show an appetite for longer loan terms, Jeff Bunch, Black Book’s vice president-lender solutions, says.

Using the right vehicle-value data can tell the recent 3-year history of a vehicle model, how it is currently performing and how it will perform over the next three years, he says. This can determine resale values and set the level of aggressiveness or cautiousness at auctions.

As pent-up demand continues to drive new-vehicle sales, lenders will continue to compete heavily for business.

This amped-up competition will make it harder for lenders to boost profit margins. So finding pockets of growth through opportune lending on the right vehicle makes and models offers an attractive option, Bunch says, adding that lenders who don’t regularly monitor portfolios could lose money.

The study shows examples of different depreciation patterns.

Without identifying the makes and models, Black Book cites the residual performance of two vehicles in the upper midsize-car segment.

After one year, Vehicle A retains 62% of its value while Vehicle B retains 42%. Moreover, Vehicle A shows an increase in retention in the third year while Vehicle B continues to lose value, leading to a 25-point spread.

A lender would want to use such data to determine the right financing on a 1-year-old vehicle vs. a 2- or 3-year-old vehicle, Bunch says. Accurate and timely data shows the varying degrees of depreciation.

Sometimes certain vehicles within a segment will depreciate at rates similar to one another. In the study’s example from the fullsize car segment, Vehicle A has a 59% retention rate after the first year, while Vehicle B is at 50%.

Both vehicles follow similar depreciation patterns over the following years, and in the fifth year Vehicle A has 39% retention and Vehicle B 29%. But in the sixth year, the residual gap has significantly narrowed.

Another example from the fullsize truck segment shows two vehicles starting out with a wide residual spread. After the first year, Vehicle A retains 68% but Vehicle B retains just 39%, a 29-point spread. But in the fourth year, vehicle A has a 47% retention rate and Vehicle B 40%.

The lesson to lenders: An older model for Vehicle B is better for their portfolio than an older model for Vehicle A, yet the reverse would be true if they were lending the same vehicles at new retail.

Sometimes, two different models can start out similar and end up far apart. Such is the case of two tracked compact pickup models. After the first year, a 7-point spread separated them. That widened to 31 points after four years.

There are anomalies. For instance, a vehicle may show a sharp depreciation in the first year, then end up with strong residuals. The opposite sometimes is true: Strong early value retentions are followed by steep declines in later years.