March 22nd, 2015
from the Cleveland Fed
Household balance sheets have garnered significant attention since the 2008 financial crisis, with consumer debt being viewed as a contributor to the recession and household deleveraging emerging as a prominent feature of the recovery. In the third quarter of 2008, growth in loan balances began to flatten out and then decline.
While this trend can be viewed as an improvement in fiscal responsibility, it has also been a drag on consumer spending and the recovery process. In recent quarters, total debt has started to edge back up.
The question now is whether the decline in borrowing has hit an end, signaling a return of consumer confidence. Data from the New York Fed's Credit Panel suggest that the answer may be yes. Home mortgage debt and credit card debt have stopped contracting. Student loans never really shrank. And auto loan balances (which include leases) have been rising for more than three years. Newly originated auto loans hit $105 billion in the third quarter of 2014, the highest they have been since the third quarter of 2005.
Why are auto loans in particular increasing so rapidly? The increase could be the result of borrowers suddenly wanting to purchase more cars, or it could be that lenders are more willing to provide credit, or it could be some combination of both. Parsing out the precise story - how much of the increase is due to an increase in the demand for cars or an increase in the supply of credit finally meeting more of the existing auto demand - is difficult.
One way to examine the issue is to look at which individuals are receiving auto loans. Breaking down auto loan data by Equifax Risk Score, we can see that new loans are not just going to low-risk borrowers. Individuals with both good and bad Equifax Risk Scores are being extended more credit. Banks are extending more credit largely to those with a higher credit rating, while finance companies are extending more credit to individuals of all risk-levels, including those with subprime credit ratings (650 and below). Finance companies supply more than twice as much credit to this group as banks.
Given that a chunk of the increase in auto loans is being dealt out to the highest-risk borrowers, this could be an indication of declining risk-aversion among lenders and an increased supply of credit. On the other hand, that people with the best credit ratings, who likely had uninterrupted access to credit even after the downturn, are also seeking out (and receiving) more auto loans suggests that the increase in lending could be an indication of increased demand for cars.
To further understand recent household borrowing trends, we can look at data from surveys of lenders and consumers. The Senior Loan Officer Opinion Survey on Bank Lending Practices, published by the Federal Reserve Board, is a survey of up to 80 large domestic banks and 24 US branches or agencies of foreign banks, which asks questions about changes in the standards and terms of, as well as demand for, the banks' loans. Since April of 2011, results from this survey indicate a consistent easing of standards on auto loans. This is further evidence that the willingness to take on more risk has increased.
In the Survey of Consumer Expectations, released every month by the Federal Reserve Bank of New York, individuals are asked if they think it is generally easier or harder to obtain credit today, compared to 12 months ago. Since mid-2013, more consumers have found it easier to obtain credit (not auto credit specifically). The percentage of respondents reporting that it has gotten harder has gone down (from 49 percent in January 2014 to 39 percent in January 2015), while the percentage of respondents finding it easier has increased (from 14 percent in January 2014 to 24 percent in January 2015).
However, attractive financing options are likely not the only driver of the trend in auto loans, and an increase in demand for new vehicles could also be moving the market. The stock of cars on US roads is aging. According to the automotive market research firm Polk, the average age of US-registered vehicles was 9.6 years in 2002. This shot up to 11.2 years by 2012. If the difficult labor market environment and the tight credit standards of the past have discouraged the purchase of new vehicles, those effects are finally abating. Pent-up demand among auto consumers for new cars may now be showing up in the auto-loan data.
Increased demand is possibly the result of aging cars on the road. According to the automotive market research firm Polk, the average age of US-registered vehicles was 9.6 years in 2002. This shot up to 11.2 years by 2012. Pent-up demand among auto consumers for new cars may now be showing up in the auto-loan data.
There are two noteworthy trends in auto loans that have been laid out here. One, the state of the auto loan market has quickly rebounded post crisis. And two, there has been continued growth in auto loans across the board, including high-risk loans. There are some indications of increasing demand for auto loans as well as greater willingness to lend to riskier borrowers. One can only hope that lenders learned a valuable lesson from their past subprime lending experience.