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Auto Sales Soar – But So Does Auto Loan Debt

Sub-prime lending and delinquencies raise concerns.

by on Aug.20, 2014

Sub-prime lending has sharply increased - though it remains lower than before the recession.

Car sales may be soaring to their highest levels since the depths of the recession but, in the process, U.S. motorists are running up record auto loan debts.

The combination of rising car prices and a negligible growth in wages has only compounded the problem, buyers going deeper into debt to drive off showroom lots. Outstanding auto loans hit an all-time record of $839.1 billion during the second quarter, a whopping 11.7% year-over-year increase, according to debt tracking service Experian Automotive.

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It marks the 13th consecutive quarter auto loan has increased, according to a separate report by the Federal Reserve Bank of New York. Overall, outstanding household debt was essentially flat, the Fed noted.

Industry data shows that new vehicle prices are hovering at near-record levels of around $31,000, and that has left consumers, who have enjoyed few raises since the recession, taking on steadily longer-term loans, something Toyota Senior Vice President Bob Carter said last week has become critical to the ongoing recovery of the U.S. auto market.

But there are some caution flags being raised. Not only has the industry seen a shift to six-, seven- and even eight-year financing, but there’s also been a rapid increase in delinquencies and defaults.

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While still at near historic lows, Experian’s second-quarter report finds that 60-day loan delinquencies increased 0.62%, from 0.58% the previous year, a 7% jump. The total balance of loans that are 60-days delinquent increased by $859 million since the second-quarter of 2013.

That’s raising new concerns about the recent increase in so-called subprime auto lending to riskier buyers.  Based on dollar volume, the share of auto loans to borrowers with credit scores of less than 620 has been on a steep rise since 2010, rising to 23% by the end of last year – though that is still below the 25% to 30% range seen before 2007 when the recession began, the Fed said.

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There are fewer and fewer car buyers with perfect payment performance noted Melinda Zabritski, senior director of automotive finance for Experian Automotive.

“We’re starting to see a slight uptick in the number of consumers struggling to make their automotive payments on time; however, we have to keep in mind that these percentages are still extremely low,” she said. “We’ll want to keep an eye on how consumers pay their bills in the coming months, as it may dictate the availability of credit in the future.”

Automakers have been dangling lower-interest loans as a lure for buyers who might otherwise find themselves stretched too thin to buy a new vehicle. That helped the industry deliver roughly 15.6 million new vehicles last year, with most forecasts calling for the market to top 16 million for all of 2014.

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Not everyone is comfortable with that approach, Honda’s top U.S. sales executive John Mendel criticizing rivals who “rely on deep-discounts and sales to corporate and rental fleets” to boost sales, rather than what he dubbed “sustainable growth” strategies.

But not everyone is worried. Though 60-day delinquencies are up, shorter, 30-day late payments have held flat, and the rate of seriously delinquent auto loans has been holding steady, at around 3%, according to the New York Fed.

(Paul A. Eisenstein contributed to this report.)

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One Response to “Auto Sales Soar – But So Does Auto Loan Debt”

  1. Mike says:

    Repo men are the weirdest bunch in the car business. Some of them can’t even get back in their old motorcycle gangs. So the thought of thousands of them losing their jobs overnight and being unleashed onto the streets with nothing to occupy their time but getting ever-more elaborate tattoos is disquieting, at best. Repos keep America strong.