A Worrying Turn Ahead for Auto Loans
Auto loan delinquencies are too high considering the strong economy
By Aaron Back
Concerns over consumer debts have abated lately as credit growth has slowed and the U.S. economy has improved. Trouble could still be lurking.
The New York Federal Reserve’s quarterly report on household debt earlier in May showed total consumer debt grew by 3.8% from a year earlier in the first quarter, significantly slower than the average 4.5% over the previous four quarters, thanks largely to a pullback in auto loans. Overall delinquency rates also declined slightly because of improvements in student loans and mortgages.
But in the two areas where lenders have been most aggressive over the past few years—credit cards and auto loans—delinquencies have continued to mount. Credit-card loans that are more than 90 days delinquent rose to 8% of total balances in the first quarter from 7.5% a year earlier, according to Fed data. The portion of delinquent auto loans rose to 4.3% from 3.8%.
Although the volume of auto-loan originations has slowed, terms remain loose. The average length of a new loan rose to 69.2 months in April compared with 65.5 months in April of 2013, according to Edmunds.com. A flood of cars coming off leases also has pushed down used-car prices. In April used-car prices fell 1.6% from a year earlier, the biggest decline since March of 2009, according to Labor Department inflation data.
A brisk economy, with falling unemployment and rising wages, seems to be keeping defaults from rising to worrying levels. In a recent note, analysts at Moody’s adjusted for this by comparing the percentage of loans recently becoming delinquent with the level of initial jobless claims.
They found that new delinquencies per 100,000 initial jobless claims have been rising for both credit cards and auto loans. This ratio remains within a normal historical range for credit cards, they found. But for auto loans it has risen to its highest level in at least 15 years. This strongly suggests that auto lending standards have been extraordinarily loose in recent years.
Auto loan defaults “should be much lower given the strong employment market, pointing to underlying risk in the loan portfolios that is likely well above historical standards,” Moody’s said.
So long as the economy is booming, this may not matter. But when the economic cycle does turn, the accompanying turn in the credit cycle will be all the more vicious. Look to auto loans for the biggest fallout.
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