U.S. auto lenders remain cautiously optimistic about their customers' ability to stay afloat even as late payments on car loans have risen above pre-pandemic levels.
High interest rates and inflated car prices are causing more stress among borrowers, according to a report Tuesday from the Federal Reserve Bank of New York.
The "worsening appears to be broad-based," New York Fed researchers wrote in a
That figure was the highest since at least 2017. Delinquency rates were much lower during the pandemic as stimulus funds and increased savings helped borrowers stay on track.
"The increasing transition rates merit monitoring in the months ahead, particularly with the amplified distress shown by borrowers in lower-income areas," the New York Fed researchers wrote.
In recent interviews and public appearances, executives at some top U.S. auto lenders have said rising delinquencies are part of a "normalization" to pre-pandemic trends. They've also pointed to some signs that suggest the worsening in credit may not get too much worse.
At Capital One Financial, auto loan charge-offs are a bit above their 2019 levels, but the company's fourth-quarter delinquency rate of 6.34% on auto loans remains below its pre-pandemic level of nearly 7%.
Auto trends have now stabilized back to their pre-COVID seasonal patterns rather than deteriorating more rapidly, Capital One CEO Richard Fairbank said during the company's fourth-quarter earnings call last month.
"We feel quite good about the performance of our auto originations," Fairbank said.
The Spanish bank Santander Group, whose U.S. division has a large auto finance business, is observing credit "normalization" in its auto loans, but it also sees positive signs, Tim Wennes, the CEO of Santander's U.S. bank, said in an interview this week.
Though Santander has been
Santander's borrowers are certainly feeling the pain of higher interest rates, inflation and elevated car prices, and some of them are falling behind on their payments, Wennes said.
But encouragingly, Santander's borrowers are finding ways to get back on track before their loans get charged off and their cars get repossessed. Before the pandemic, nearly all of the company's borrowers who were at least 90 days delinquent soon went into a charge-off. Today, it's closer to two-thirds.
"People are finding ways to stay in their car, and we're working very hard with our customers to try to help keep them in their car," Wennes said. He added that Santander has become more proactive in reaching out to customers who may be struggling and offering flexibility to those who need it.
Net charge-offs on Santander's U.S. auto loans rose to 4.3% at the end of 2023, up from a low of 1.7% in 2021, but still significantly below its 2019 charge-off rate of 6.7%, according to a Santander earnings presentation.
Executives at Detroit-based Ally Financial, whose core business is auto lending, have also pointed to signs of a stabilizing credit environment. They noted recently that the yearly increases in delinquencies have been milder for four straight quarters.
While charge-offs are now above their pre-pandemic levels, Ally executives have said they expect them to peak by midyear. The company's charge-off rate for 2023 was 1.77%, in line with its guidance.
"We're confident retail auto losses remain below 2% for [2024]," Russell Hutchinson, the company's chief financial officer, said last month.
Ally's credit metrics have benefited from the lender's decision to give struggling borrowers a bit more leeway and time to get back on track, including by delaying repossessions of their cars, Hutchinson said.
"Giving our collectors additional time to work the credits and giving our borrowers a little additional time tends to work out in our favor," Hutchinson said. "And we're getting better outcomes by doing that."
One factor that has been contributing to borrower difficulties is the sharp rise in auto prices — both for new cars, since supply-chain shortages during the pandemic disrupted auto production, and in the used-vehicle market, where demand increased as a result of the new-car shortage.
Monthly payments for lower-income borrowers jumped from $407 in 2018 to $564 at the end of last year, the New York Fed found.
Used-auto prices have fallen from their peak in 2022, and the amount that borrowers finance has also dropped somewhat, the New York Fed said. Total originations of auto loans fell to roughly $165 billion during the fourth quarter, down from about $179 billion a quarter earlier and nearly $199 billion at the middle of 2022.
In all, auto loan balances stood at roughly $1.6 trillion at the end of the quarter, up $12 billion from a quarter earlier, the New York Fed said. Total household debt rose $212 billion to $17.5 trillion, driven mainly by increases in credit card debt and mortgages.
The quarterly report from the New York Fed is based on data from the credit bureau Equifax.
