Auto loan access tightens, but other factors ease the squeeze

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

Zooming in: Cox Automotive reports that the All-Loans Index was 94.8, meaning auto credit accessibility decreased by 0.1% from April but is up 0.9% year-over-year. Notably, all lenders tightened in May, with banks leading the pullback and captives, along with credit unions, showing the most loosening year-over-year.

• So far this year, auto loan access has risen. Yet, the average approval rate is still down 2.4% year-over-year despite increasing slightly month-over-month. Subprime loans saw the most meaningful decline, from 13.2% to 12.5%.

• Used loans through independent dealers saw the most loosening year-over-year, while certified pre-owned loans loosened only marginally.

What’s more: Other factors moved in favor of consumers this month. Yield spreads tightened, indicating that the market is less worried about risk. When spreads widen, the market demands a higher premium for lower-tier credit quality. Term lengths also grew, down payments declined, and the approval rate increased, all of which were improvements for consumers.

Why it matters: Although auto credit availability mostly maintained in May, there is a gradual return to affordability in some areas of the market. Despite these conditions, the new car market is on track for another year of sales growth.

Looking ahead: Some experts say the auto financing system in the U.S. is broken. There are 40 – 50 million people in the U.S. without a FICO score or with a thin credit file who need transportation. If lenders got a more complete picture of a consumer’s financial situation, then loan approvals could rise, potentially leading to more dealership sales.

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