cars in parking lot

Demand for Auto Loans Is Boosting the Lending Business

Auto Lending Became a Bigger Part of Bank Balance Sheets in 2021

Auto lending is providing consumer banks with a boost at a time when lending activity is down. Bank of America (BAC), Wells Fargo (WFC), and Ally Financial (ALLY) all posted significant increases in auto loan originations last year. The auto loan market is nothing new for these institutions, but 2021 was noteworthy in certain respects.

Analysts report consumers didn’t take out many loans last year, as the robust job market and government stimulus packages kept people flush with cash. Still, auto loans outperformed lending in general as US banks increased their auto loan balances by 12% — compared to what was only a marginal increase otherwise.

Supply-Chain Constraints Not Great for Car Makers, But Nice for Lenders

Market observers note last year’s supply-chain constraints also boosted the auto lending business. Short supply forced consumers to consider used cars more often, driving their prices to record levels. Higher prices mean higher loan amounts for banks.

The numbers further illustrate the story, as the average amount for a new car loan in Q3 2021 rose 8.5%, while the same figure was closer to 20% for used car loans. Analysts also point out another advantage for lenders when this type of event occurs: while delinquency rates were low last year with consumers having plenty of cash on hand, cars seized for delinquent payment could then be sold on the lot for record prices.

The Auto Lending Party Could Be Over Soon

Industry observers say market conditions are ideal for auto lending right now, but that could start to change. New vehicles will start to hit the market as the chip shortage and supply-chain issues ease up, which analysts expect to gradually happen over the course of the year.

Analysts note other risks as well if borrowers run into financial trouble. While car loans written at a higher amount seem like a good thing for banks, this could make people more likely to default. Furthermore, new cars hitting the market will push down the price of repossessed used cars. There are a number of factors keeping lenders in the sweet spot right now when it comes to auto loans, but it’s not clear how much longer that will last.

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ABOUT Meg Richardson Meg Richardson is a writer specializing in markets, technology, and personal finance. She loves breaking down seemingly complex ideas and making them readable and interesting for everyone. She holds an MFA in writing from Columbia University. When she is not writing about finance, she enjoys running in Central Park and drawing cartoons.

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