Despite a temporary slowdown in vehicle sales in 2020, the U.S. auto loan industry has continued its decade-plus expansion through 2022. The same restricted supply that has slowed down sales has helped keep prices high, to lenders’ benefit. As a result, some of the numbers still look promising for auto lenders. But a lot of uncertainty lies ahead. Here are some key takeaways to consider.
- Higher vehicle prices are larger loan amounts. Though 2019–2020 saw total consumer auto loan debt rise just $0.04 trillion, from $1.33 trillion to $1.37 trillion, the total by the end of the second quarter (Q2) of 2022 was $1.50 trillion, up $0.13 trillion in just six months.
- Total vehicle sales in 2021 were 15.4 million, an increase from 2020’s 14.9 million.
- The total number of loans held by Americans in the first quarter (Q1) of 2022 (80.2 million) was 4% above the low point in Q1 2020 (77 million).
- Auto loan rates are rising but are still when compared to the rates of the 1980s.
- Higher prices and interest rates have led to an increase in average monthly payments across all credit tiers of 13% to 19% year-over-year.
- The average credit scores of borrowers are at historical highs: 738 for new and 675 for used vehicles.
- The average new auto loan amount is at a record high of $40,290.
- Year-over-year growth in average used auto loan amounts rose to 18.66% in 2022, up from 12.58% in 2021 and 4.89% in 2020.
- The percentages of auto loans to less risky prime and near-prime borrowers have grown, while riskier loans to lower-credit-score borrowers have shrunk.
- Auto loan volume and originations are at an all-time high.
- The average credit score for borrowers has never been higher.
- Though the 15.4 million total vehicle sales in 2021 were higher than in 2020, this was still below 2019’s 17.5 million.
- By the end of August 2022, only 9.3 million vehicles had been sold. If the same monthly sales average continued through the end of the year, this would equate to just 14.0 million in total sales, below the 2020 total.
- The total number of loans held by Americans in Q1 2022 was 1% lower than in Q1 2021. In other words, demand for auto loans is still high but lower than last year.
- Delinquency rates are rising, though Q2 2022 rates remained below the Q2 2019 rates. (Rates in 2020 and 2021 were down.)
So, what is the state of the U.S. auto finance market? Can we expect the industry to continue expanding, or are we on the cusp of a contraction? What can we expect from the sector in 2023?
This report will try to answer those and similar questions. We will take a good look under the hood of the auto financing industry and see how outstanding balances, originations, and delinquency rates are looking for key demographics.
But first, let’s take a step back and see how the auto loan industry fits in the economy as a whole.
The auto financing industry and the U.S. economy
The auto loan industry might not attract as much attention as the mortgage or student loan industries, but it is a key driver of the U.S. economy. Consider this. In 2021, Americans bought 15.4 million vehicles. Auto companies and their suppliers are responsible for 3% of the U.S. GDP. In short, it is the largest manufacturing sector — not to mention employer — in the United States.
These levels of production are possible thanks to auto loans.
Over 83% of new cars are financed
It’s not just new cars, either. Although you may expect new cars to be financed, over 40% of used cars were bought with a loan. This dependence on financing is nothing new. The percentage of new car purchases using loans has not changed much in the last 10 years. And financing for used car purchases rose a bit in 2022 after dropping in 2021.
20% of new vehicle sales are leases
It’s easy to forget about the importance of leasing in the auto industry, particularly in the new auto sales sector. Consider this. Even after a significant drop in 2022, 20% of all new vehicles are leased. While this is a significant amount (one in every five vehicles), it does mean a drop from the 29% high (nearly one in every three vehicles) seen in 2018–2019 and 2015–2016. In fact, 2022 leases fell back to a level not seen since 2012.
Auto loan debt is the third-largest source of debt in the United States
Auto loan debt represents 9% of all household debt. Mortgages (70%) and student loan debt (10%) were the only sources of credit with larger loan balances.
The overall auto debt increased from $1.42 trillion in Q2 of 2021 to $1.50 trillion in Q2 of 2022. This is an increase of $0.08 trillion, or $80 billion. Because ongoing auto loan payments lower the total auto debt balance, this indicates that auto loans originated over this period totaled more than $80 billion.
Auto loans are the second most common source of credit
There are more than 109 million auto loans in the United States. Credit cards are the only source of credit with more accounts. However, auto loans typically have much larger balances than credit card accounts.
Auto loan debt grew despite 2019–2020 headwinds
In its 2020 report on 2019 data, Experian found that vehicle loans and leases outstanding had soared to a then-record high of $1.3 trillion and auto loan balances had grown by 81% since 2009.
While the events of 2019–2020 might have led one to expect this growth to reverse, Experian’s 2022 report on 2021 data found that vehicle loans and leases outstanding had risen to $1.43 trillion and auto loan and lease balances were up 6.5% since 2020. Federal Reserve data, which does not include leases, also shows continued growth.
The auto loan industry reported a 4% increase in its year-over-year growth
It was good while it lasted, but the extended run of record sales is slowing down. However, the last quarter we have data for still saw a 4% year-over-year growth in originations. Sadly, the Consumer Financial Protection Bureau (CFPB) has yet to release data for the last quarters of 2019 and for 2020 and 2021, so the picture here is incomplete.
Demand for auto loans hits a 10-year low
Auto loan demand is down. Granted, a quarterly or semiannual chart with early 2022 data provides a more mixed picture due to seasonal fluctuations.
Annual figures, however, including all data through the end of 2021, show a clear downward trend over the last decade.
So, Banks report a lower interest in auto loans, continuing a decade-old trend. These statistics are based on a survey the Federal Reserve performed on 69 banks. In addition to reporting lower demand, surveyed banks indicate that they expect to tighten lending standards in the months ahead.
Lenders, particularly banks, are tightening credit requirements
This predicted tightening reverses a recent trend toward looser standards.
Lenders, especially banks, are again playing it safe and restricting credit even though delinquency rates are still relatively low.
This forces captive lenders, such as Ford Motor Credit and Honda Financial Services, to loosen credit requirements to maintain sales growth. However, it’s not captive lenders who have the highest ratio of subprime borrowers.
Auto loan rates are rising but still historically low
Auto loan rates are moderate when it comes to volatility. They have fluctuated more than credit card interest rates but less than mortgage rates. Data for 48-month auto loans goes back to 1972 and ranges from 17.36% in 1981 to 4.00% in 2015. In the last decade, interest rates have stayed in the 4.00%–5.5% range.
Interest rates will probably start rising substantially in 2023, but we are still a long way away from the rates of the early 80s.
Monthly payments increased by up to 19% year-over-year
A perfect storm of high interest rates, higher vehicle prices, and a modest growth in loan term length has triggered a hike in the average monthly payments across all credit tiers of 13% to 19% percent year-over-year
72-month auto loan rates are lower than 48-month auto loans
Most auto loan lenders provide terms ranging from 24 to 72 months. Typically, shorter-term loans have lower interest rates. However, the average rates for 72-month and 60-month auto loans are lower than traditional 48-month auto loans.
There are several factors at play here. For instance, borrowers who get longer terms are often buying newer more expensive cars and tend to have higher credit scores. However, another reason for this inversion is that lenders expect interest rates to rise in the short- to mid-term as the Fed continues to fight inflation, but plateau or even drop later on when the Fed is forced to jumpstart a sputtering economy.
Prime borrowers, more expensive cars, and longer terms drive auto loan growth
Despite the drop in year-over-year growth, auto loan debt continues to rise. The growth is driven mainly by prime borrowers who are paying more than ever for new and used cars.
Over 65% of auto debt is attached to prime borrowers
Borrowers are not spread evenly among lenders when it comes to credit profiles. Consider, for instance, auto finance companies, also known as non-bank financial companies (or NBFCs). Half the outstanding loans owned by auto finance companies were originated by subprime borrowers. In contrast, small banks and credit unions only have 14% of their auto loan balances invested in subprime borrowers. The graph below provides more details on the outstanding auto loan balances by credit profile and lender.
The average loan amount for new and used cars has never been higher
On average, Americans borrow $36.6k for new cars and $23.8k for used cars, or $60.3k total. That represents a 42% hike over the $42.5k financed 10 years ago.
The average loan term for new and used vehicles is 66 months
In 2021, the average loan term was 66 months. That is over 6 months more than the average term in 2011. But it’s not just new auto loans. From 2011 to 2021, the average auto loan for used cars also grew by seven months from 56 to 65 months. And in 2022, new and used car loan terms converged at 66 months.
Average auto loan rates are up significantly from 2014–2016 lows
Twenty-two years ago, the average rate for a 48-month auto loan was close to 10%. So, today’s averages remain low in historical terms. And they have dropped from the highs of 2018–2019. Still, they are well above their 2014–2016 lows — and they’ve started back up.
Auto loan originations
Loan origination data tells us how many new auto loans were added to the auto financing market within a given period. This helps us identify new trends in the auto financing markets. The origination data below includes both auto purchase and auto refinancing loans.
Auto loan originations hit all-time high but growth was slowing through 2019
Growth in the auto loan industry started to stall in 2017. In 2019, origination continued to plateau. The lack of growth and the concerning increase in auto loan delinquencies — more on that below — may signal 2019 entry into the late stages of the U.S. economy’s business cycle. However, not all states were hit equally. In some states, lenders were still reporting solid growth.
Although, at the end of October 2022, the Consumer Financial Protection Bureau (CFPB) had yet to report origination data beyond 2019, auto loan originations have been trending upward in dollar terms, complicating the picture.
Vermont and South Dakota were hardest hit by drop in auto loans originations
The big winners of 2019 were Louisiana and South Carolina, with 18% and 17% growth in auto loans. South Dakota and Vermont, on the other hand, were the hardest hit, with -23% and -22% auto loan volume changes.
Younger consumers lag behind elders as originations trend upward from 2020
Although originations for all age groups under 60 roughly plateaued in 2015–2019, they have since trended upward. Meanwhile, origination among consumers over 60 show signs of plateauing. Though originations among young consumers have joined the upward trend, they have risen less rapidly than among consumers aged 30–49.
The slower growth among young consumers is in keeping with the delinquency rates shown below, which indicate younger borrowers are struggling with auto loan payments.
Auto loans by credit score
For years, auto loan originations have grown among buyers of all credit scores. This changed in 2019.
Buyers with great credit are driving the remaining growth
Buyers with credit scores above 760 were responsible for 33% of the $314 billion in auto loan originations from 2021 Q2 to 2022 Q2, according to the Federal Reserve Board. Subprime lenders, on the other hand, were responsible for only 17%. Nevertheless, auto-loan participation is at a record high. So there are still more subprime borrowers than ever before. This is particularly concerning when you look at the delinquency rates among subprime borrowers.
Subprime borrowers are being pushed out of the market
Although lenders are tightening standards, credit inquiries continue to increase. This means more and more subprime borrowers are struggling to qualify for a loan.
The median credit score for auto loan borrowers is 710 — near its historic highs
The credit rating of the auto loan industry has rarely been better, since the Federal Reserve started collecting data in 2000.
Auto loan market share by lender type
We can learn a lot about the auto financing market by looking at which sources of credit borrowers are using and the changes in market share over time.
Banks and captive lenders still control the lion’s share of total auto financing
After lender setbacks in 2020, credit unions especially drive renewed growth
In the years leading up to 2020, as banks tightened requirements and focused on highly qualified borrowers, credit unions and auto finance companies aggressively increased their market share. Both credit unions and auto finance companies lost loan volume in 2020 (Q2). Captive lenders also saw reduced loan balances in 2020 (Q1). These drops in loan balances have not correlated with a significant loss of market share, however, and credit unions especially have increase their auto financing market share significantly in 2022.
Banks are still the biggest players in auto financing, but they have lost ground to credit unions, captive lenders, and auto finance companies over the last decade. Banks have backed away from the auto finance sector in favor of markets with wider margins. In the process, they have tightened their credit requirements. So qualifying for an auto loan with a bank can be a challenge.
Banks typically offer very competitive loan rates and have state-of-the-art online platforms. Banks are also an attractive option for borrowers who value having access to a local branch that can offer personalized customer care. On the downside, rates are typically higher than with credit unions, and some lenders charge high fees on auto loans.
Excluding institutions that do not offer auto loans, the leading banks by total assets are:
Credit unions are responsible for 25.8% of all auto loans and 26.7% of new auto loans. Although they operate in a similar way to banks, they are nonprofit organizations owned by the depositors. This allows credit unions to offer lower fees and interest rates than even banks.
While banks and captive lenders report declines in market share, credit unions continue to show strong growth. The top lender of auto loans in aggregate is CU Direct, a network of 1,100 credit unions and 14,800 dealerships. CU Direct has over 100 credit unions as shareholders that go from Arkansas Federal Credit Union to the University of Wisconsin Credit Union.
Other leading credit unions with significant market share are these:
A captive lender is a finance subsidiary of a car manufacturer. Auto companies use them to help buyers finance their vehicles. Though captive lenders once dominated used financing, their 7.89% market share in 2022 fails to impress. Nevertheless, they remain a useful resource for borrowers who need them.
A few worth noting are the following:
Buy Here Pay Here dealers
“Buy here, pay here” dealerships (also known as BHPH) are auto dealers that also finance the cars they sell. They differ from traditional dealerships in that they provide in-house financing instead of relying on third-party lenders. BHPH usually target buyers with poor credit who don’t qualify for auto loans with more competitive rates and terms.
Auto finance companies operate similarly to banks and credit unions. But they don’t accept consumer deposits (such as checking or savings accounts) and are often more open to borrowers with subprime credit. Some leading auto finance companies based on market share are:
Auto loan volumes by income
It is important to consider income when assessing auto lending trends. The income of a household will determine whether it needs credit to buy a car and if it will be able to qualify for the credit it wants. Income can also determine the rates you qualify for and the likelihood you will default on your payments.
Car ownership is a key indicator of wealth
Owning a car is among the most powerful indicators of economic progress for U.S. households. However, the high cost of buying and maintaining a vehicle is a huge barrier for low-income households.
Car owners make 3x as much as those who don’t
A study published in the Journal of Planning Education and Research analyzed the relationship between car ownership and income in 1950 and 2013. The study revealed that car owners make more than three times as much as those who don’t. This financial gap grew more than the gap between homeowners and renters, or those with and without college degrees.
Auto loan delinquency rates
Delinquency rates on loans tell us what percentage of the debt is overdue for payment. It can act as the canary in the gold mine and warn investors of an imminent downturn. It is probably the most useful of credit stress indicators.
Percentage of auto loan debt 90+ Days Delinquent by Loan Type
Auto loan delinquency rates look low compared to credit card and student loans. However, auto loans have the highest delinquency rate among secured loans. What is even more concerning is delinquency rates are rising for auto loans as the overall delinquency rate drops.
Delinquency rates are on par with those following the 2008 crash
According to 2022 Q2 data from the New York Fed, 3.98% of auto loan balances were 90+ days delinquent in the last quarter of 2021. Based on Federal Reserve Board figures indicating total auto loan debt outstanding of $1.3 trillion in 2021, that equates to $62.27 billion in delinquent auto loan by the end of 2021. This underestimates total delinquencies, of course, since any loan more than 30 days overdue is delinquent. But we may expect at least some loans less than 90 days in arrears to be brought current.
Though delinquency rates have been trending downward since the latter half of 2019, current rates are still on par with those seen in the aftermath of the 2008 financial crises. The vast majority of delinquent auto loans are “subprime,” with about 18% of all auto loan originations in Q2 2022 categorized as subprime.
After origination, many subprime auto loans get packaged by banks, similar to what was done with subprime mortgages in the years leading up to the housing crash. Considering the current economic conditions, auto loan delinquency rates could soar in 2023. If this happens, it will put further strain on the financial system.
Auto loan delinquencies are rising but mostly because of subprime borrowers
On the surface, the credit profile of the auto loan industry has never been in better shape. Borrowers have the highest average credit scores recorded. Yet, its performance is falling. Delinquency rates are rising, particularly among subprime borrowers.
Younger borrowers are struggling the most to afford their auto loans
Borrowers under 30 are 56% more likely to default on their auto loans than those in their 30s. And borrowers in their 30s are 53% more likely to flow into serious delinquency than borrowers in their 40s. While the difference in defaults between people in their 30s and 40s has been around for some time, the gap between borrowers in their 20s and 30s has expanded since 2014.
A short history of the auto loan industry
Installment plans existed long before the first automobile rolled out of Henry Ford’s factory. But it was auto loans that exploded the use of installment loans to finance large purchases.
We all know that assembly lines increased the volume and speed at which car manufacturers produced vehicles. However, those factories needed a steady demand for vehicles. As is the case today, cars were expensive. Few families could afford to buy one with all cash. Enter the auto financing industry. Two companies that illustrate well the infancy of the auto loan industry are Ally Financial and Ford.
GM’s financial ally
The first major player in the auto loan industry was General Motors Acceptance Corporation (GMAC), the financing arm of GM, which was created in 1919. Consumers had to pay 35% down and pay the balance within a year.
By 1977, GM financed its 75 millionth vehicle and introduced related products, such as mechanical coverage. In 2000, GMAC became a bank, and in 2009 it transformed into Ally Bank.
Today, Ally Finance — its new name — offers a wide variety of banking products. However, auto finance is still a big part of its operations. It provides financing to 18,000 dealers and more than 4 million auto buyers in the U.S.
Ford’s savings plan
Ford’s initial answer to GM was a more fiscally responsible option that did not meet consumers’ demand for immediate credit. Ford created what was essentially a savings plan that required buyers to put a down payment and make weekly payments of $5 to $10 until the car was paid. The catch is there was no credit involved. Buyers could not pick up the vehicle until it was fully paid.
In 1928, Ford Motor Credit Company LLC was created as the financing arm of Ford. While other big financing arms, such as GMAC and Chrysler, now operate as separate companies, Ford Credit is still a wholly-owned subsidiary of Ford.
Banks and credit unions enter the market
In the 1950s, banks started to offer auto financing products. The implementation of vehicle identification numbers (VIN) and credit scores helped lenders manage risk more efficiently and encouraged more lenders to enter the market.
Improvements in the production quality of cars also made it possible for buyers to finance their vehicles for multiple years. Previously, lenders were concerned about offering loans with terms longer than a year because they feared borrowers would stop making payments when they had to start paying for auto repairs.
Today, the automotive finance industry isn’t dominated by one company. Dealers use credit aggregations systems that allow them to send standardized credit applications to multiple finance sources. In 2022, banks and credit unions own 54% of the market share. Auto finance companies, a new type of lender that didn’t exist until relatively recently, are already close to 13% market share. Captive lenders, on the other hand, have seen their market share drop, but they still own nearly 23% of auto loan balances.
The future of the auto finance industry
These are interesting times for the auto finance industry. We are living at the crossroads of disruptive social and technological forces that are changing the way we think of transportation. Although it is impossible to be certain about what the future holds for the auto finance industry, here are some predictions based on current trends.
Auto loan interest rates will increase
Interest rates continue to grow as the Federal Reserve raises short-term interest rates. The Federal Reserve recently signaled it will keep rates into 2023 as inflation remains strong. This means it will be harder for car buyers to find bargains. We expect the average rate of five-year loans to hit 6% and four-year loans to go up to 6.5%. And these numbers could be conservative if the Fed remains aggressive in its anti-inflation policies.
In the short-term, market share will shift to finance companies, credit unions, and captive lenders
Banks lost market share in 2022 (27.9% vs. 30.3%). Credit unions gained (25.8% vs. 18.3%) market share, as did (to a lesser extent) finance companies (12.6% vs. 11.6%). Though finance companies’ total loan balances have yet to recover from 2020 setbacks, credit union growth is especially strong. Delinquency rates are still relatively low, so auto lenders can keep lending requirements and terms accessible. However, this trend won’t last if delinquency rates continue to rise.
Auto leasing will continue to grow
The growth trend of auto leasing shows no sign of slowing down. Leasing provides a middle-ground between auto ownership and car-sharing that is gaining popularity, particularly among prime borrowers.
Mobility as a service will continue to grow
Although our thirst for auto ownership will not die overnight, it is equally clear that ride-sharing and shared ownership are here to stay. These new models will help keep vehicles affordable as technology and production cost increase. However, the scale of their growth and ultimate success are still uncertain. A lot hangs on technology regulation and social acceptance.
Personal auto financing will eventually shrink
The car-sharing model will ultimately cause auto sales volume to drop. If big swaths of the market choose on-demand mobility instead of buying a private car, we will need fewer vehicles. The auto finance market will shrink, and commercial financing will grow. According to a study by Deloitte, commercial auto financing could absorb 35% of the entire auto financing market.
Auto lenders will need to adapt
In 2021, dealerships originated 61% of all new auto loans. If the ride-sharing and the car-sharing revolution continue, the current dealer point-of-sale financing model will shift.
Dealerships will need to adapt by making drastic changes to their business models. This could mean providing their own mobility service or gaining an edge on the remaining private and commercial auto sales.
For large banks and finance companies, the changes could be less dramatic. Some well-diversified players may just need to shift their emphasis from the auto lending sector to the equipment purchasing sector.
View Article Sources
- Auto Finance Insights: State of the Automotive Finance Market, Q2 2022 — Experian
- Auto and Truck Seasonal Adjustment, September 30, 2022 — Bureau of Economic Analysis (BEA)
- Consumer Credit – G.19, October 2022 — Federal Reserve Board of Governors
Links to the listing of monthly releases. The most recent release, October 2022 when this article was last updated, always appears here.
- Consumer Debt Continued to Grow in 2021 Amid Economic Uncertainty — Experian
This is the stable archival copy of the report. Experian updates the live page each year with new results. See the live page here.
- Debt Reaches New Highs in 2019, but Credit Scores Stay Strong — Experian
- Do More People Finance Auto Loans at a Bank or Dealership? — Experian
- Finance Companies – G.20, October 2022 — Federal Reserve Board of Governors
Links to the listing of monthly releases. The most recent release, October 2022 when this article was most recently updated, always appears here.
- Financing the Future of Mobility — Deloitte University Press
- Idaho, the Carolinas Lead the Country With Biggest Increase in Car Loans — Experian
- Origination activity — Consumer Financial Protection Bureau
By the end of October 2022, sadly, the Consumer Financial Protection Bureau (CFPB) was still providing no data beyond that it released in December 2019.
- Quarterly Report on Household Debt and Credit 2022:Q2 (Released August 2022) — Federal Reserve Bank of New York
When sources differ on total debt or loan figures, we have, for consistency, used the New York Fed data for Q2 of 2022.
- Senior Loan Officer Opinion Survey on Bank Lending Practices — Federal Reserve Board of Governors
- State of the U.S. Automotive Industry 2020 — American Automotive Policy Council (AAPC)
AAPC does not always keep older reports posted when it publishes new ones, and this 2020 report was the most recent posted as of early October 2022. Future readers may find an archival backup of this report here.
- The Poverty of the Carless: Toward Universal Auto Access — Journal of Planning Education and Research
- Top 100 Banks and Thrifts Nationally by Asset Size — Federal Deposit Insurance Corporation
- TransUnion Auto Credit Industry Insights Report August 2022 — TransUnion
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.