The Consumer Financial Protection Bureau (CFPB) is eyeing the relationship between rising car prices and changes in auto loan characteristics and performance. In a September 19, 2022, blog post, the bureau expressed concern about the impact of larger loan amounts and higher monthly payments on the financial health of consumers with near-prime or subprime credit scores.
The CFPB cited supply chain disruptions, chip shortages and the war in Ukraine as contributors to slower production. These factors helped increase costs for new vehicles and boost demand for used cars. Consequently, the dollar value of outstanding auto loans rose. From the first to second quarter of 2022, the average new and used auto loan amounts jumped to about $40,000 and $28,000, 15 percent and 35 percent higher than pre-pandemic levels, respectively.
Prior to the pandemic, loan terms grew steadily as a way to reduce monthly loan payments, the CFPB noted. However, the rate of extension of loan terms is no longer keeping pace with price hikes and loan amounts. That combination has led to an increase in average monthly payments.
Citing the rising rate of transition into delinquency, especially for low-income borrowers; inflationary pressures that might cause car ownership costs to outpace income growth; and the impact of higher interest rates on consumers’ monthly budgets, the CFPB reiterated its intention to continue seeking additional data about this market and monitoring lending activity. “We are focused on ensuring a fair, transparent, and competitive auto lending market by ensuring affordable credit for auto loans, monitoring practices in auto loan servicing and collections, and fostering competition among subprime lenders,” the blog post concluded.