US Auto Loan Growth Slows Despite Rising Vehicle Sales

Growth in auto loan balances remained relatively modest in 2024, despite a surge in new and used vehicle sales. This trend can be attributed to the rising interest rates prompting more consumers to opt for cash purchases.

A shift Towards Cash Purchases

The share of new vehicles financed with cash climbed to 20% in recent quarters, up from 18% in Q1 2022. This increase is especially noteworthy because subsidized leases and rate-buydowns often encourage financing even when consumers might otherwise prefer cash. For used vehicles, the share of cash purchases surged to 65%, a meaningful jump from 59% in Q1 2022, according to Experian data.

Debt Burden Remains Manageable

The burden of auto debt on households, measured by the auto-loan-to-disposable-income ratio, has experienced a downward trend. Despite population, employment, and income growth, disposable income increased at a faster pace than auto loan balances. This resulted in the ratio dipping to 7.53% by the end of 2024, remaining within a relatively low range throughout the year.

Delinquency Rates Vary Widely

Overall auto loan delinquency rates in December 2024 ticked up to 1.58%, only slightly higher than December 2023. Subprime loans, as was to be expected, presented a greater risk, with delinquencies reaching 6.15%,up from 5.94% in December 2023. As noted by Fitch, subprime loans represent a smaller segment of the market, primarily financing used vehicle purchases. Prime-rated auto loans, on the other hand, continue to exhibit robust performance with delinquency rates hovering around 0.37%.

Implications for Consumers and the Economy

This shift towards cash purchases and the manageable debt burden suggest a cautious approach to auto financing among consumers. While factors like rising interest rates are influencing this trend, it also highlights the importance of responsible borrowing practices and financial planning. The continued strength in prime auto

How do you think rising vehicle prices are influencing consumer decisions regarding financing options?

US Auto Loan Growth Slows: A Conversation with Alex Kramer

Despite a surge in vehicle sales, auto loan growth has remained modest in 2024. To understand this trend, Archyde sat down with Alex Kramer, esteemed auto industry analyst and contributing editor at CarTalk Magazine, to discuss the shift towards cash purchases, manageable debt burdens, and varying delinquency rates.

A Shift Towards Cash Purchases

archyde: Alex, we’re seeing a significant increase in cash purchases for both new and used vehicles. What’s driving this change?

Alex Kramer: High interest rates are certainly a factor. Consumers are becoming more cautious about taking on debt. Additionally, as vehicle prices have risen, some consumers are opting for cash to avoid long-term finance commitments. We’re also seeing a cultural shift, with consumers preferring the flexibility and security of owning their vehicles outright.

Debt Burden Remains Manageable

Archyde: Despite population and employment growth, the auto-loan-to-disposable-income ratio has decreased. how do you explain this?

Alex Kramer: While auto loan balances have grown, disposable income has increased at a faster pace. This has helped to ease the debt burden on consumers. Moreover, the trend towards responsible borrowing and cash purchases has contributed to this positive development.

Delinquency Rates Vary Widely

Archyde: While overall delinquency rates remain low, subprime loans continue to present a greater risk. How concerned should we be?

Alex Kramer: While subprime delinquencies are up slightly, it’s essential to note that they represent a smaller segment of the market. The prime auto loan sector continues to show resilience. However, we must remain vigilant, especially as used vehicle prices remain high, which may force some consumers into subprime financing.

Implications for Consumers and the Economy

Archyde: What advice would you give to consumers looking to finance a vehicle in the current market?

Alex Kramer: First, be realistic about what you can afford.Consider the total cost of ownership,not just the monthly payment. It’s also crucial to maintain good credit to secure the best rates.And, if possible, consider setting aside funds for a larger down payment to reduce the principal and lower your monthly payments.

Archyde: Alex, in your opinion, what does this trend towards cash purchases and manageable debt burdens tell us about the health of the US economy?

Alex Kramer: It signals a degree of consumer caution and responsibility, which is encouraging. Consumers appear to be prioritizing financial security and flexibility. This bodes well for the economy in the long run,as consumers who maintain manageable debt levels can better weather economic storms.

Thank you, Alex, for your insightful analysis of the current auto finance landscape.