What—and Who—Is Driving Delinquencies in Auto Loans?

By Jack McCabe
ABA Economic Research Analyst

While auto loan debt continues to grow, its pace of growth is moderating as delinquencies climb. While banks should be mindful of this, a closer look at the data show that the delinquency growth is being driven primarily by subprime loans at auto finance companies, whose underwriting is not as conservative as that of traditional financial institutions like banks and credit unions.

Auto sales have plateaued

After the onset of the financial crisis, consumer spending dropped sharply and there was significant deleveraging by consumers across all loan categories. When the job market started to rebound in 2010, the pent-up demand for autos began to drive sales higher. After rising steadily over the period of 2010 through 2015, auto sales plateaued and as of April sat at 16.4 million vehicles sold (seasonally adjusted annual rate).

Consumers have continued to purchase new vehicles over the past three years, but not at an ever-growing rate like during the first half of the decade. This is somewhat surprising given the 10 million jobs created in the last four years alone, as well as strong GDP growth last year as a result of the tax reform law. Some of this can be explained by the move into urban centers and the overhang of student loan debt, which has led younger consumers to shy away from owning a car. These patterns are reflected in the demographics of auto loans.

Auto lending remains strong, but growth is slowing

Auto loan debt continues to grow, far outpacing all other categories of consumer debt with the exception of student loans. According to the Federal Reserve Bank of New York, auto loan debt has increased by 82 percent since it bottomed out in the second quarter of 2010. The auto lending market is split evenly between banks and credit unions and auto finance companies, as total balances are roughly the same at both groups. Additionally, over one-third of Americans carry auto loan debt, up over five percentage-points since 2010.

The age of borrowers is increasingly skewing older. In fact, the share of auto loan originations going to borrowers under the age of fifty is down twelve percentage-points since 2000. Moreover, the 18-29 age group’s share of originations is down roughly five percentage-points since the third quarter of 2007 (just before the start of the recession), and it is the only age group whose total originations measured in dollars were lower in Q1 2019 than it was in both Q1 2000 and Q3 2007.

Since the Great Recession, auto loan originations have gone predominantly to borrowers with credit scores above 760, but originations to subprime borrowers (less than 620) have nearly reached pre-crisis levels. Digging deeper, the profile of auto loan balances held at different types of institutions tells an important story. The rise in subprime lending has been driven almost exclusively by auto finance companies, where around 35 percent of auto loan balances are subprime. The collective balance of auto loans at banks and credit unions is only 12 percent subprime, while more than one-third of the loans are to borrowers with credit scores above 760. Auto lending done by regulated depository institutions remains safe and sound.

Auto finance companies see higher delinquencies

The prominent danger spot in the auto lending market has been and continues to be subprime borrowers at auto finance companies. Delinquency rates for borrowers of all credit scores are higher at auto finance companies than at banks and credit unions, but those for subprime borrowers are worrisomely elevated. Delinquency rates for subprime borrowers at auto finance companies reached a high of 10.9 percent in 2009 before falling back to pre-crisis levels. However, they have risen back to the highs witnessed during the Great Recession even with the current strong economy. Subprime delinquency rates at banks and credit unions, for comparison, are less than half of those at auto finance companies and remain at pre-crisis levels. While delinquencies have predictably begun to inch up over the last two years, the American Bankers Association’s Delinquency Bulletin shows that both direct and indirect auto loan delinquencies at banks remain near historically low levels.

What’s next?

As the economy shifts into a lower gear, and with the uncertainty surrounding auto related tariffs, auto sales are likely to slow even further. ABA’s Economic Advisory Committee forecasts sales to steadily decline throughout the end of the year and into 2020. With high-quality loans and low delinquencies, banks are positioned well to handle a slowdown in this market.