Earnings Season Shows Consumer Pressures on Auto Loan Payments

Earnings reports this season, particularly from banks, have taken note of the resilience in consumer spending, especially on debit and credit cards, in various areas of discretionary activity, including dining out and travel.

But some stats and commentary from banks also hint at the pressures that may lie with what’s arguably non-discretionary spending, the loans on the books that must be paid to get from point A to point B — literally.

It’s been no secret that auto loans are more expensive than they have been in years. Experian reported last month that more drivers than ever are carrying auto loans that require them to pony up at least $1,000 every month. Over 4% of drivers have crossed that threshold, compared to a relatively tame 1% during the pandemic.

As it stands now, the average monthly auto loan payment is $655, with an attendant 6.8% interest rate on a 72-month loan, per Experian’s data. In 2022, the average monthly payment was $579 with a 4.8% rate. Low-credit-scoring individuals would pay higher rates than the average.

And as the Federal Reserve reported over the summer in its assessment of the second quarter’s household debt levels and performance, auto loan balances were up by $10 billion in the second quarter and stood at more than $1.6 trillion. Through the past year, 8% of auto loan balances transitioned into delinquency.

Separately, Edmunds reported Tuesday (Oct. 15) that the share of people who are “underwater” on their car loans — where the loans owed are greater than the value of the vehicle as measured at trade-in for new vehicles — stood at 24%, up from 18.5% a year ago.

PYMNTS reported last month that the Fed’s first rate cut in four years would not do much to help make items more affordable, and auto loans are typically fixed-rate debt, which means that consumers who took out those loans as the Fed began its aggressive rate hiking journey in 2022 wound up taking on expensive debt.

Financial firms reporting earnings this month have pointed to tighter lending standards. In some cases, mounting charge-offs point toward a future where refinancing that debt or rotating into cheaper vehicles may be a tough road to travel.

Ally Financial Sees ‘Cumulative’ Impact of Inflation

Ally Financial’s third-quarter earnings results released Friday (Oct. 18) underscore the pressures building in auto lending. The company noted that its retail auto loan net charge-offs were 2.2%, a level that management termed “elevated,” and which was higher than the 1.8% seen a year ago.

The company’s earnings presentation also detailed that the percentage of retail auto delinquencies stood at 4.5% for 30+ days delinquencies, up from 3.9% last year. Auto loan originations were $8.4 billion, down from $9.9 billion last year.

Management said on a conference call with analysts that on charge-off guidance, the range stands at 2.25% to about 2.3%, up from 2.1% that had been prior guidance.

Ally Chief Financial Officer Russ Hutchinson said during the call that “we’re all dealing with a unique set of circumstances that arise coming out of the pandemic in terms of what we saw in 2022 where we saw a consumer that was faced with higher prices at the dealership, higher used car prices and also just some of the dynamics around excess savings coming out of the pandemic and the inflation that we’ve seen since in terms of the cumulative impact of inflation on people’s overall budgets… We’re all dealing with elevated loss content across our vintages, but in particular, with the 2022 vintage. And that was a large vintage for us here at Ally.”

Elsewhere, earnings results released Oct. 11 by J.P. Morgan showed that auto loan and lease originations in the latest quarter were $10 billion, down from $10.8 billion in the second quarter and $10.2 billion a year ago.

Wells Fargo’s earnings results showed that the size of the company’s auto loan portfolio continued to decline, down 14% from last year to $43.4 billion on continued credit tightening.

We’ll know more when Capital One reports earnings later this week. Platforms like CarMax have reported increases in provisions for loan losses (in that company’s case to $112 million, where the tally had been $89.8 million a year ago) and CarMax management also noted that it is tightening lending standards.