Wall Street and Banks Concerned About Car Buyers’ Growing Debt

Wall Street and banks are reportedly growing concerned about car buyers’ debt load.

Bloomberg reported Friday (Jan. 6) that the size of outstanding auto loans — which rose from $1.44 trillion in the third quarter of 2021 to $1.52 trillion in the same quarter in 2022, according to the Federal Reserve Bank of New York — puts both borrowers and lenders at risk.

The report also cited an Edmunds report that the share of U.S. consumers paying at least $1,000 a month for a vehicle reached a record high of 16% in the fourth quarter of 2022, up from 10.5% in the same quarter in 2021 and 6.7% in the fourth quarter of 2020.

“For the median household currently earning about $70,000 annually, that would be roughly 17% of their monthly income,” Vanderbilt University professor Mark Cohen told Bloomberg, adding that most car buyers typically pay 4% to 6% of their monthly income.

In addition, while the average price of new cars is nearing $50,000, the price of used cars has been decreasing. This has banks concerned that borrowers and lenders could face difficulties if car owners owe more than the vehicle is worth, the report said.

Edmunds said in a Wednesday (Jan. 4) press release that consumers were shielded from questionable financing decisions by the low interest rates and high trade-in values seen early in the pandemic.

“But as we shifted toward an environment with diminished used car values and rising interest rates over the past few months, consumers have become less insulated from those riskier loan decisions, and we are only seeing the tip of the negative equity iceberg,” Edmunds Director of Insights Ivan Drury said in the release.

Edmunds said in the release that interest rates on new financed vehicles stood at 6.5% in the fourth quarter of 2022, which was up from 4.1% in the same quarter a year earlier.

PYMNTS reported in August that a credit crunch looms for auto lenders.

At the time, 13% of all consumers said they had spent more than what they earned in the previous six months.

When faced with the choice between putting food on the table and operating the car, paying the car note on time may take a back seat.