- Key insight: Auto lending volume and risk grew in tandem last quarter, with lenders approving more lower-credit score borrowers, as transitions into serious delinquency also rose.
- Expert quote: "It still reflects this K-shaped economy, where there are a lot of households who live paycheck to paycheck." — New York Fed researcher
- Supporting data: The $211 billion of auto-loan originations was the highest quarterly volume in the history of the New York Fed's data, though researchers cautioned the figure has not been adjusted for inflation.
New auto-loan volumes hit a record high in the second quarter as lenders relaxed their underwriting standards, and the percentage of borrowers falling behind on their payments continued to rise.
Auto-loan originations climbed to $211 billion, according to data released Tuesday by the Federal Reserve Bank of New York, which called it the highest quarterly volume on record. Outstanding auto-loan balances saw "solid growth" in the quarter, the New York Fed said, reaching $1.71 trillion, up $28 billion from the prior quarter and up $58 billion year over year.
The rising car-loan originations came as credit standards slipped. The median credit score on newly originated auto loans fell seven points from the first quarter, according to the report. Compared with the prior quarter, a larger share of new loan volume went to people with credit scores below 720, while the share going to better-qualified borrowers edged down.
The loan growth also came with a corresponding rise in consumer stress. The share of auto debt transitioning into serious delinquency — 90 or more days past due — rose slightly year over year to 3.00% in the second quarter. Transitions into early delinquency also ticked up slightly.
The New York Fed researchers emphasized on a Tuesday call that the second-quarter auto-loan origination figure is a nominal one that does not account for the sharp rise in car prices over the past six years. It's unclear whether the figure represents a record in inflation-adjusted terms.
Second-quarter auto-loan origination data typically shows a seasonal uptick, partly driven by tax refunds hitting consumers' pockets, New York Fed researchers said on the call.
Auto-loan delinquencies are "definitely higher than they were before the pandemic. They're not as high as the Great Financial Crisis, but they're high," a New York Fed researcher said on the call. "It still reflects this K-shaped economy, where there are a lot of households who live paycheck to paycheck."
During the second quarter, the percentage of auto-loan balances that were least 90 days delinquent reached the second-highest level since 2003, according to Ted Rossman, an analyst at Money Management International who analyzed the New York Fed's data.
A lot of car buyers purchase a car once every five or ten years — meaning the "sticker shock" can be severe, Rossman said.
A shopper trading in a paid-off car may not be prepared for a loan carrying a $700-$900 monthly payment, and that gap between expectation and reality is fueling both higher loan balances and, for some borrowers, delinquencies, he said.
Additional data beyond the most recent New York Fed report shows subprime auto-loan delinquencies are "rivaling or even exceeding Great Recession levels," Rossman said. The uneven distribution of financial strain is further evidence of an economy where lower-income and lower-credit-score households have been squeezed hardest by inflation, he added.
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Beyond loan payments, Rossman pointed to a broader affordability squeeze for car owners. Gas prices remain elevated, and insurance costs have climbed sharply, driven in part by higher repair costs tied to materials, tariffs and labor, he said. Those costs have risen even faster than headline inflation, likely factoring into rising delinquencies in ways the loan data alone does not capture, according to Rossman.
As new auto-loan delinquencies remain at elevated levels, New York Fed researcher Joelle Scally said in a press release that the central bank will "continue to monitor" the trend.
More broadly, the New York Fed researchers noted that while consumer-loan delinquency rates remain somewhat elevated compared to pre-pandemic levels, they appear to be stabilizing rather than worsening. Total household debt edged down $14 billion in the second quarter to $18.8 trillion, while aggregate delinquency rates fell slightly to 4.7%.
That data may reflect a shift in who is borrowing, according to the New York Fed. Credit-card ownership has expanded — particularly among younger borrowers, where delinquency rates are running highest.
Taken together, the researchers described the second-quarter data as evidence of a "fair amount of financial stress amongst households," saying that the trend is holding fairly steady rather than deteriorating further.
