Auto financing gets tougher as incentives ramp up

Auto credit availability, a measure of how easy it is for consumers to get financing for car purchases, declined in August for the fifth month in a row.  

Driving the news: Auto loan approval rates are down from July, negative equity is climbing, and term lengths are decreasing. Rising auto delinquency rates, particularly among subprime borrowers, are also sounding alarm bells about the financial health of American consumers. 

Why it matters: As banks tighten auto loan criteria to guard against loan defaults and financial losses, the stakes are high for many Americans. Car ownership has been shown to improve financial stability and upward mobility. Car owners are twice as likely to have a job and four times more likely to keep it, plus they can earn up to three times more than those without a vehicle, according to Sanjiv Yajnik, President of Financial Services at Capital One.

Quick facts: Cox Automotive reports that its All-Loans Index was 92.5, meaning auto credit accessibility decreased by 0.5% from July and is down 1.7% year-over-year.

• In August, most lenders cut access to auto loans. Credit unions tightened the most, while auto-focused finance companies eased their standards slightly.

• Of new car loans not financed through a captive lender, those completed at franchised dealers saw the least tightening. Used loans saw the most tightening during the month.

• Yield spreads widened, indicating that the market is more worried about risk. When spreads widen, the market demands a higher premium for lower-tier credit quality.

The good news for consumers: Average new car transaction prices (ATPs) have continued to fall month-over-month for nearly a year. The ATP in August was $47,870.

The reason: The average incentive package rose to 7.2% of ATP, the highest since early 2021, and they’ll likely keep growing.

Why? As fall settles in, dealers are slashing prices and boosting incentives to clear out 2024 models and make room for the incoming 2025s. This year's model changeover comes just as dealers face inventory overloads (+40% year-over-year) for the first time since the pandemic. Increased inventory has created an urgency to sell off 2024 stock — before it turns into "day-old bread."

Bottom line: Facing a slower annual sales pace of 15.1 million units in August, dealers are leaning hard on their go-to move: cranking up incentives. While automakers are stepping up with more offers, tight credit is pushing dealers to get creative with extra discounts and financing.

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