The big banks are pushing further into auto loans.
Bank of America Corp.
said last year was a record high for auto loan originations. Wells Fargo & Co. posted three consecutive record quarters and said the fourth quarter was up 77% from a year earlier. Allied Financial Inc.
said 2021 was its biggest year for auto loans since 2004.
Car lending is a daily bread activity for many consumer banks. But their financial results for 2021, released earlier this month, showed it was a particularly bright spot as consumers and businesses were otherwise cash-strapped and slow to take out loans.
U.S. banks have increased their auto loan balances by 12% during 2021, according to a Moody’s Investors Service analysis of a handful of the largest. Banks increased the total loans on their books slightly last year.
Generous government stimulus packages and a buoyant labor market have helped stabilize the financial situation of many consumers and limit their demand for bank loans.
Restraint has been overpowered by another pandemic trend in the automotive market. Supply chain bottlenecks have reduced new vehicle production and pushed used car prices to record highs. With a shortage of cars and a recovery in demand, especially for more expensive sport utility vehicles, consumers have been paying more and taking out bigger loans.
“When someone asks me how many cars we sold last month, I say, ‘All of them,'” said Brian Benstock, general manager of Paragon Honda & Acura in Queens, NY. month.”
The average new car loan in the third quarter was $37,280, up 8.5% from a year earlier, and the average used car loan was $25,909, up around 20%, according to credit reporting firm Experian PLC.
The total dollar amount of auto loans hit a record pace in the first nine months of 2021, according to the latest data from the Federal Reserve Bank of New York. Financial results from lenders suggest the market remained hot in the final three months of last year.
For lenders, the economics of a loan are currently working in their favor, in part because of the rising value of used cars. While delinquencies have been low, lenders who needed to repossess cars were able to sell them on the used car market at historically high prices. In some cases, they were able to recover more money than they originally loaned. (In a normal market, lenders tend to lose money when they sell repossessed cars.)
Banks also tend to serve customers with higher credit scores. “The world of credit has become more privileged,” said Melinda Zabritski, senior director of automotive financial solutions at Experian.
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Still, the current sweet spot for auto loans may only last until supply constraints ease and more vehicles hit the market.
“We expect used car prices to come down,” said Moody’s analyst Warren Kornfeld. “They are not durable.”
Falling prices could pose a risk to lenders who have made large loans on cars at higher values, and the consumers who have taken them out. In this scenario, car owners could be more likely to default if they run into financial difficulties, Kornfeld said. And if lenders repossess those cars, they’ll get less back from selling them in a down market.
For now, market momentum is good for banks. They provided 29% of new car financing and 34% of used car financing in the third quarter of last year, up from 25% and 31%, respectively, a year earlier, according to Experian.
That pushed market share away from automakers’ financing units, analysts said. These so-called captive financing arms tend to offer cheap loans when trying to increase vehicle sales. But demand outstripping supply, the captives withdrew.
“It opened up an opportunity to come in and compete for a bigger share of that market,” said Tim Owens, head of consumer vehicle lending at Bank of America.
Write to Ben Eisen at [email protected]
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