Bank regulators and analysts are wondering if it's too easy to get a loan for a car.
The rising volume of new car loans is drawing the attention of bank regulators and analysts, who are watching for signals about what the increasing demand for loans says about the state of the economy and the car business.
Researchers from the Federal Reserve Bank of Cleveland noted that newly originated auto loans hit $105 billion in the third quarter of 2014, which is the highest level since 2005.
Federal Reserve Bank of Cleveland researchers Emre Ergungor and Caitlin Treanor claim the rapid growth in auto loans is due to an increase in the demand for cars and a continuing easing of standards in the supply of credit.
Breaking down auto loan data by Equifax risk score, the researchers say that individuals with both good and bad credit scores are receiving more credit. Banks are extending more credit largely to those with a higher credit rating, while finance companies are extending more credit to individuals of all risk levels, including those with subprime credit ratings of 650 and below.
Data from surveys of lenders also indicate a consistent easing of standards on auto loans, say Ergungor and Treanor, indicating an increase in the willingness of lenders to take on more risk.
Fueling the demand for new vehicles may be the aging stock, the two researchers noted. The average age of U.S.-registered vehicles was 11.2 years in 2012, up from 9.6 years in 2002.
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Ergungor and Treanor also noted data from the New York Fed’s Credit Panel suggest that the post-recession decline in household borrowing has come to an end, signaling a return of consumer confidence. In addition to the increase in auto loan balances, the researchers note that student loans never really shrank and home mortgage debt and credit card debt have stopped contracting.
At least part of the gain in car sales, which are now expected to hit 17 million units this year, and auto related lending is driven by the continuing expansion of job opportunities if not wages. The economy added another 295,000 jobs in February despite the frigid and icy winter weather that prevailed over much of the country last month. The jobs number released by the U.S. Department of Labor beat Wall Street’s expectations.
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Since the vast majority of Americans, regardless of what kind of job the have, drive to work rather than use public transportation, the expansion of the labor market has clearly helped boost car sales, analysts note.
“The underlying strength that has kept (consumer) confidence at high levels has been job gains,” observed Richard Curtin, the head of the University of Michigan’s survey of consumer sentiment. “While buffeted by harsh weather and lower gas prices, consumers have remained focused on gains in jobs and wages. Consumers intend to increase their spending during the year ahead, but they also want to keep a tight rein on their debt as well as to increase their precautionary savings.
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Curtin added low gas prices have had a larger impact on lower income households, narrowing the difference between low and high-income households, he said. The data indicate that total real personal consumption expenditures will grow at 3.3% during 2015.
The surge in automotive-related lending has also drawn the attention of federal regulators, who have put several large lenders on notice recently that they intend to examine standards and practices used in subprime lending.
Regulators have expressed concern the auto loans if not done prudently, could become major liabilities. They also want to insure that lenders and car dealers aren’t using any discriminatory practices.