Risky Lending Drives Auto Loans to Highest Level in 8 Years

N.Y. Fed: Auto Loans Soar to Highest in 8 Years
Rich Pedroncelli/AP

WASHINGTON -- U.S. auto loans jumped to the highest level in eight years this spring, fueled by a big increase in lending to risky borrowers, according to a report Thursday by the Federal Reserve Bank of New York.

Yet the New York Fed also said that loans to borrowers with shoddy credit, also known as subprime lending, still make up a smaller proportion of total auto loans than before the Great Recession.

Federal banking regulators have raised concerns in recent months over the rapid increase in subprime auto loans. Such loans could lead to more defaults, harming banks and consumers. Auto loans are also packaged into securities and sold to investors, like mortgage loans. That could amplify the impact of any rise in auto loan defaults.

This spring, banking regulators at the Office of the Comptroller of the Currency said that "signs of increasing risk are evident" in auto lending. They found that lenders are making larger car loans. As a result, the size of car loans in default has increased in the past two years.

The Justice Department said last week that it is investigating General Motors' (GM) financing arm over its subprime lending practices.

Still, the New York Fed report stops short of recommending specific steps. In a separate post on its website, New York Fed economists said they would "continue to monitor" the issue.

Banks and other lenders issued $101 billion in new auto loans in the April-June quarter, according to the quarterly report on household debt. Total outstanding auto loans rose to $905 billion in the second quarter.

Auto loans are the third-largest source of Americans' debt, after mortgages and student loans. Mortgage debt actually declined in the second quarter to $8.1 trillion while student debt rose to $1.12 trillion. Americans have $669 million on their credit cards.

Mortgage lending weakened in the second quarter to the slowest pace in 14 years. That includes both mortgages for purchase and refinancing. Banks have significantly tightened their credit standards for mortgage loans since the recession. Home sales have also leveled off this year.

The Fed's data shows that the dollar amount of subprime auto loans -- defined as loans to borrowers with credit scores below 620 -- has nearly doubled since 2010. For borrowers in the two most credit-worthy categories -- defined as those with scores above 720 -- auto lending has risen by only about one-third.

The automakers' financing arms account for most of the increase in subprime loans. In the second quarter, the dollar value of their subprime loans was triple that of the banks. Economists at the New York Fed said that loans by auto financing companies are much more likely to become delinquent than those by banks.

Still, auto lending to credit-worthy borrowers has also jumped, the report said. As a result, just 22.2 percent of auto loans were subprime in the second quarter. That is still below the 25 to 30 percent that existed before the recession.

And the percentage of auto loans that were 90 days or more overdue was 3.3 percent in the second quarter, the same as in the first quarter. That compares to 3.4 percent of mortgages that were overdue, 10.9 percent of student loans, and 7.8 percent of credit cards.

Are You Driving a Lemon?

Increase your money and finance knowledge from home

Intro to Retirement

Get started early planning for your long term future.

View Course »

Understanding Credit Scores

Credit scores matter -- learn how to improve your score.

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

This is the tip of a very large iceberg.
Just wait until these over-leveraged young people with expensive degrees that they borrowed money to finance start walking away from their debt en masse.
We've failed to control college costs by simply offering to lend more and more money to students -- many of whom will hold degrees that are essentially useless in our economy.
Soembody will pay for this bad debt and it won't be the banks.
Those chickens will come home to roost sooner than we think and it will make auto loan defaults look like very small potatoes.

August 15 2014 at 10:34 AM Report abuse rate up rate down Reply


Translate Button

[hahy-fuh n]



a short line (-) used to connect the parts of a compound word or the parts of a word divided for any purpose.

So what your purpose for.dividing this word DOPEY-EST? (And spelling it wrong)
It sure as hell isn't a compound word.

August 14 2014 at 8:52 PM Report abuse -2 rate up rate down Reply


Which of you two is the dopey-est, is still being debated.

Open up another tab with an online.dictionary, then try again ya friggin dope.

August 14 2014 at 8:16 PM Report abuse -2 rate up rate down Reply

Here we go, again. This is like deja vu.

The big banks are writing used car loans for people with shaky credit. Then, they are slicing and dicing these loans into "packages" and reselling these sub-prime auto loans to other businesses.

This will end badly --- just like the housing sub-prime loan mess did. Then we can expect the government to rush in and save the "too big to jail" sleazy banksters.

August 14 2014 at 3:31 PM Report abuse +4 rate up rate down Reply

Hey..................... juststeve35.............Then why are the banks lending them the money in the first place................... Of course I would blame the banks for this................It's a GOP trait it's called GREED....

August 14 2014 at 2:23 PM Report abuse rate up rate down Reply

Who cares... the car companies want to make MONEY and their employees want their BONUSES for selling all of these cars... Live For Today... Who cares about tomorrow... And, the auto companies KNOW FOR SURE that when they got broke, Uncle SAP will BAIL THEM OUT again with YOUR tax dollars, just like they did in 2009.... We never learn.

August 14 2014 at 2:12 PM Report abuse +1 rate up rate down Reply

Those stock holders need a payout, been slacking lately. Plus the new Bugatis are coming out soon.

August 14 2014 at 1:59 PM Report abuse -2 rate up rate down Reply
1 reply to darbrow717's comment

@ darbrow --- Any individual who is holding bank stock(s) in their investment portfolio has to be crazy. The three major stocks that people get into trouble buying are banks, retail stores/restaurants, and tech. You are likely to get burned on all three of those.

Banks have started EVERY financial crash we have had in America. Every. Single. One. Without exception. Bank over-extend with their greedy pyramid schemes and crooked lending and then they collapse and go over the financial cliff --- dragging the rest of the economy with them.

August 14 2014 at 3:38 PM Report abuse +1 rate up rate down Reply
1 reply to Valerie's comment

Even black Monday 1987?

August 14 2014 at 9:07 PM Report abuse -1 rate up rate down

Can't wait until THIS bubble bursts and the Progressive Left tries to blame the banks and the GOP for the fact that these entitled 'stiffs' signed loans they damn well knew they had no intention or ability to repay.

August 14 2014 at 1:59 PM Report abuse -1 rate up rate down Reply

Risky Lending Drives Auto Loans to Highest Level in 8 Years
they did the same thing with housing.

who will audit and end The Fed?

August 14 2014 at 1:47 PM Report abuse rate up rate down Reply

The next bubble.

August 14 2014 at 12:54 PM Report abuse +4 rate up rate down Reply