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The auto financing industry achieved a major benchmark in 2017 with outstanding auto loan balances hitting the $1.1 trillion mark for the first time. According to Experian, it is a 7.1 percent increase over the prior year. That is slightly more than the total amount of credit card debt in the U.S. However, it’s still shy of the $1.4 trillion in student loan debt held by Americans. The record comes amid a softening of consumer demand for new cars and an abrupt tightening of auto loan approval standards by banks.
Much of the increase in total auto loan balances came from an increase in prime auto loans, even as subprime auto loans declined. Prime and super-prime loans now account for 60 percent of the outstanding balance, while subprime and deep subprime loans account for 22 percent. Only three years ago subprime loans were growing at record pace, but recent tightening by lenders has kept a lid on their growth in the last year.
High Delinquency Rates Have Led to Tighter Standards
According to the New York Federal Reserve, banks have tightened their approval standards in the last six months which has led to a drop in subprime loans. Experian reported that subprime loans fell to a 10-year low in the first quarter of 2017. This is likely due to an increase in the number of delinquencies over the last year.
The New York Fed report indicates that the 60-day delinquency rate has ticked up to 0.67 percent from 0.62 percent a year earlier. The 30-day delinquency rate is at 2.20 percent, down from 2.22 percent. The more alarming statistic coming from the report are the 6 million Americans now 90 days or more behind on their car payments, a number which is expected to increase. Despite the drop off in subprime loans, borrowers with the lowest credit ratings still hold over $210 billion in auto loan debt or about 20 percent of the $1.1 trillion in total outstanding debt.
Buying More Car Than Buyers Can Afford
The New York Fed also reported that demand for auto loans has softened generally over the last year, which raises the question as to how the total outstanding loan balance has reached record heights. That answer may be found in part by the fact that more car buyers are opting for longer loan terms. Car buyers are choosing longer loan terms in order to keep their monthly payments low, which is a strong indication that many are buying more car than they can afford (hence, increasing delinquency rates).
The average new-car loan term is 68.8 months, two weeks longer than the prior year. The average used-car loan term has increased by a week to 63.98 months. New-car loan terms of 61 – 72 months now account for 40.4 percent of the outstanding loans, while 73-84 month terms account for 32.5 percent. Just five years ago the most popular loan term was 48 months. Despite the lengthening of loan terms, the average monthly payment for a new car has risen to $504, $5 more than the year before. The average lease payment is $412, up $8 over last year.
Record Number of Americans Hold Auto Loan Debt
The record high auto loan balance may also have something to do with another milestone that was reached this year. As reported by the Fed, there are now 107 million Americans carrying auto loan debt, also a record. That number represents about 43 percent of the population. That’s an increase of nearly 35 percent since 2012. Today there are more Americans with auto loans than there are home loans, which is a reversal over the last five years.
After several years of record car sales, with the all-time high being reached in 2016, the buying frenzy may be over. The more tempered demand for new cars, coupled with tighter loan approval standards, may let some of the air out of the bubble before increasing delinquencies cause it to burst.
Author: Jeff Gitlen