What’s All This Talk About Auto Loans?

What’s All This Talk About Auto Loans?

Before we begin, let’s be clear, FDIC-insured banks are NOT the only institutions that finance auto loans and leases. In fact, bank  auto loans account for less than half (but more than a third) of the U.S.’s $1.157 trillion auto debt.

Automobile finance companies, i.e. Ford Motor Credit, Toyota Financial, and a myriad of others, account for the largest slice. While Credit Unions represent a more modest, but growing segment of U.S. auto loans. As always, our focus is on the federally-insured institutions that could be affected by any downturn in the industry.

The leading U.S. auto lender when it comes to FDIC-insured banks is ****Wells Fargo Bank, N.A., Sioux Falls, SD, which has roughly $60.5 billion in outstanding auto loans. As of the end of 2016, 2.8% of those loans were at least 30 days past due. That’s up 30 basis points from a year earlier. However, if you just look at the 90 days past due and those in nonaccrual status, the numbers change dramatically. At year-end 2016, 0.34% fell under this category, up from 0.32% at year-end 2015.

The list on page 7 contains all FDIC-insured banks that have Automobile lending that exceeds 10% of total loans and more than 4.5% of those auto loans at least 30 days past due as of the end of 2016. Wells Fargo does not fall into either of these categories.

****Capital One N.A., McLean, VA on the other hand, does. Capital One is the third largest FDIC-insured auto lender with 30%, or $47.9 billion, of its total loans concentrated in automobile lending. Of those, 6.6%  were at least 30 days past due at 12/31/2016. While high, it has gone down from 7.22% a year earlier. Capital One did not have any loans reported as 90 days or more past due and still accruing at either year end, but its auto loans in nonaccrual status dropped from 0.53% at 12/31/2015 to 0.47% at 12/31/2016. So it is definitely on the right path.

So why do we keep reading that auto loans are going to be the next disaster?

The white portion of the following chart derives from the Federal Reserve (G.20) Statistical release:

The shaded areas were calculated and completed by BauerFinancial.

In other words, when financing a car, we are  paying a higher interest rate for a longer period of time. It now takes longer than five years to pay off even a used auto and 5½ years to pay off a new car.

Hypothetically, a person looking to purchase a used car could finance for 48 months instead of 61 months and save $1,508.21 in interest over the life of the loan. But, here’s the caveat, the monthly payment would be  $458.90. That’s a high payment for a used car, especially when we consider that wages have been pretty stagnant.

What our hypothetical person is apt to do instead is opt for the new car. Hypo will have to finance $11,425 more but at the lower rate of 5.1%. If the loan is extended out another six months (to 72 months or six years), the monthly payment will be $457.26, just under that of the used car for 61 months.

Up until now, the finance companies have been able to take advantage of lower used car values by charging higher rates and extending the terms. But if people only opt for new cars, it won’t be long before the supply of used cars is so abundant they will be making crazy deals to get rid of them. That would cause underwriting standards to loosen and mistakes to be made.