Honda's long term loans make expensive cars more affordable by reducing monthly payments over an extended period but the car will lose value before the loan is up

American Honda Finance Corp increased the portion of longer term loans in its latest auto loan ritization, Honda Auto Receivables 2015-2.

Loans with terms of five years or more account for 16.6% of the 2015-2 pool, which is higher than 14.2% in 2015-1 and 14.2% in 2014-4 and prior pools, according to Fitch Ratings.

Loans that extend payments beyond the five-year mark are typically used by borrowers looking to purchase a more expenseive car then they could otherwise afford. These loans are considered riskier because the borrower spends a longer time "underwater" on the loan, owing more than the vehicle is worth. This exposes investors to higher loss severity if the obligor defaults, according to Fitch Ratings.

On the upside, Honda’s longer-term loan concentration for its securitization is still much lower than those of industry peers. These loans are also primarily offered to the issuer’s top credit–tiered borrowers, which are more likely to meet payment obligations.

Fitch has assigned preliminary ‘AAA’ ratings to $282 million of class A-2 notes due August 2017, ‘AAA’ ratings to $343 million of class A-2 ratings due February 2019 and ‘AAA’ ratings to $124.5 million of class A-4 notes die August 2021. Initial hard credit enhancement (CE) is 2.75%.

The ratings agency will not rate $261 million of class A-1 notes due May 2016

JP Morgan Securities is the lead underwriter.

The weighted average FICO of 2015-2, is 759, consistent with recent pools. New vehicles total 92%, and the WA seasoning is 13.4 months.

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