American consumers are revving their engines again in the auto market – and borrowing more than ever to fund their car purchases. While the share of subprime loans seems under control so far, such unprecedented borrowing is nonetheless adding to Americans’ debt loads.
Americans had $886 billion in outstanding auto loans in the fourth quarter of 2014. That’s up nearly 23 percent from the same period two years ago, according to recent data from credit agency Experian.
Related: Car Companies Grab Loan Business from Banks
The average loan amount also hit its highest level on record at $28,381, up more than $950 from a year ago. The percentage of new vehicles purchased with financing in the fourth quarter of 2014 increased over the previous year to 84 percent.
“Consumers have returned to the market and they’re buying cars again,” said Melinda Zabritski, senior director of automotive financing. “These cars are more expensive and Americans are using auto loans more than [before].”
Here are several factors that are encouraging Americans to purchase cars and to use financing:
Cheap Gas. Gasoline prices collapsed nearly 61 percent from their high last summer to the low in January and are set to drop further, leading people to buy more cars. (There were 60 million new cars and 39 million used cars registered in 2014.)
Pricier Vehicles. The average price of a vehicle has also reached all-time highs, with $31,831 for new cars and $16,800 for used cars, according to TrueCar.com.
Related: 18 Percent of Us Fears We’ll Never Be Out of Debt
Low Interest Rates. Interest rates for new vehicles crept up 19 basis points in the fourth quarter from a year ago to 4.56 percent, but are still relatively low by historical standards.
Separately, the vast generation of millennials has shed its “let’s share everything” bias now that many have jobs. What they want is a car of their own. Of course many millennials do not have good credit ratings—yet.
The share of subprime loans (those made to Americans with credit ratings below 600) was at 20.3 percent in the fourth quarter, down from 22.3 percent in the fourth quarter of 2010 and below the pre-recession level of 29.6 percent in the fourth quarter of 2007.
There was a lot of discussion in 2014 about the risk of subprime auto loans, but Zabritski noted their share hasn’t grown that dramatically and those loans have actually performed decently.
Delinquencies remained flat in the fourth quarter of 2014, rising only 1 basis point to 2.62 percent compared to a year earlier.
A cooling factor in the auto loan market this year could come directly from lenders. Wells Fargo, the top lender in the used retail loan market and also an active player in the new retail loan market, recently announced it would place a dollar volume cap on its subprime auto loans. This action could very well be followed by other major auto loan lenders.
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