Exploring the Growing Constraints of Auto Financing Options
Credit Access Tightening Across Lender Types
According to a Dealertrack report, credit access in the auto industry has been tightening consistently on a year-over-year basis. This trend is observed across all lender types, with auto-focused finance companies experiencing the least tightening while credit unions face the most significant constraints.
Declining Credit Availability and Channel-Specific Trends
In the month of May 2023, most channels witnessed a decline in credit availability. However, there was a slight expansion of credit access for independent used loans, while certified pre-owned (CPO) loans experienced the most significant tightening. When comparing year-over-year data, all channels exhibited tighter credit conditions, with CPO loans facing the most stringent constraints.
The Decline in Subprime Shares and Rise of Prime Loans
Continuing the downward trajectory, the subprime share of auto loans declined from 11.7 percent to 11 percent, marking a 1.2 percent decrease over the past year. This trend aligns with the findings of Experian's State of Automotive Finance first quarter report, which indicated a decline in subprime loans to 16 percent, while prime loans accounted for over 65 percent of the market.
Loan Composition in the Used Car Market
Within the used car market, prime loans constituted 56 percent of all loans, while subprime loans comprised 43 percent, nearing a record low. This shift in loan composition reflects the changing dynamics of the lending landscape.
Impact on Average Used Car Loan and Monthly Payments
During the first quarter, the average used car loan amount decreased from $28,010 to $26,420. However, the average interest rate rose from 8.67 percent in the past year to 11.17 percent, leading to an increase in the average monthly payment from $505 to $516.
By examining these trends and data points, it becomes evident that auto credit is becoming increasingly stringent, with implications for both consumers and the overall market dynamics.