Auto loan access tightens in July as lenders grow cautious

Auto credit access, a measure of how easy it is for consumers to get financing for car purchases, declined in July for the fourth month in a row.  

Driving the news: Auto loan availability is shrinking fast. Approval rates are down, interest rates are elevated, and fewer people qualify for subprime loans.

Of note: According to the New York Fed, around 8% of auto loan balances were newly delinquent (30 days late) in the second quarter.

Why it matters: As the Federal Reserve scrutinizes the economy for clues on when to cut interest rates, auto lending conditions are a massive indicator of consumer stress. Fear of rising defaults is prompting banks to tighten credit standards, making it particularly tough for those with lower credit scores.

Quick facts: Cox Automotive reports that the All-Loans Index was 92.9, meaning auto credit accessibility decreased by 1% from April but is up 1.5% year-over-year.

• All lenders tightened in July, with banks experiencing the most tightening for the fifth consecutive month while auto-focused finance companies tightened the least.

• Used loans through franchised dealers and certified pre-owned loans saw the most tightening.

What’s more: Other factors moved against consumers this 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. Term lengths and down payments held steady, but the average approval rate is down 4% year-over-year, all of which are no help to consumers.

Bottom line: The tightening of lending standards is creating a two-tiered auto market. While those with cash or large down payments are still buying cars, many everyday consumers are being shut out. This is forcing people to hold onto older vehicles, which hurts both consumers and car dealers.

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