The auto lending industry is bracing for more complications later this week as the Federal Reserve considers what to do with rates, as inflation remains an overall concern.
Driving the news: For the fifth straight month, the auto loan approval rate increased, hitting 73.9% and the high point since last August’s 74.4%.
Dealertrack’s Access to Credit index hit its highest level since November 2015.
Cox Automotive Chief Economist Jeremy Robb noted, “We’ve definitely continued to see more aggressive lending appetites for some time, and that is part of what is transpiring with credit availability trends.”
Also happening: Lenders are lengthening terms for customers and extending credit to more subprime borrowers.
The share of loans at 72 months or longer is at 31.3% in August, a record and the third straight month above 31%.
At the same time, the subprime share rose to 16.6%, the first increase in five months after falling back from near 20% in March.
“The subprime share has definitely grown, mostly at the expense of super prime,” Robb said. “Total subprime share in September is up 6.8 percentage points for new year-over-year, and trends for used are the same but more muted, up just 2.4 percentage points year-over-year.”
Rising negative equity: The share of loans rolling negative equity into new loans hit 57.4%, a rise of 60 basis points in August from July.
It is the highest amount since April and remains 3.9% above last August’s 53.5%.
Down payments held at 13%, matching October 2022 for the lowest level in four years.
Impact of finance rates: Dealertrack data shows the average new vehicle loan rate dropped at the end of July to 9.76% from 9.78%.
That used rate was 13.99%, an increase from 13.97% the previous month.
More recent numbers, according to Robb, show an increase in new loan rates and used rates remaining steady.
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What will the Fed do: The Bureau of Labor Statistics’ most recent number showed annual inflation at 3.4%.
Federal Reserve Chairman Kevin Warsh noted in his address at Jackson Hole that the Fed had “work to do” to get to the 2% inflation target.
The Fed has held rates steady between 3.5% and 3.75% since January.
Robb said that a rate hike is being priced into the market.
“One thing we really need to emphasize for auto is that the rate story is likely far more influential on the psychology of purchasing a vehicle versus reality,” Robb said. “With current conditions, a quarter point rate hike (assuming passed entirely along to the consumer) only raises a new payment by $6 per month and only $4 for used. And—if the Fed moved to a hiking cycle and increased rates by a full point over the next six months (which isn’t anticipated), the new payment would rise by just $22 per month and used by $16.”
Bottom line: Lenders have been extending credit to borrowers in higher risk tiers and offering longer terms with less down to help customers with affordability.
In other words, dealers will need to keep an eye on the market that could be impacted by other economic factors aside from oil prices and inflation.
Also worth noting: The likely Fed rate increase this week, Robb said, comes on the heels of news of the slowdown of AI model development that could pull money out of the economy. Without the AI investment, the GDP would be at an estimated 0.5% instead of 1.8%.
“While unemployment remains low and consumer spending holds positive, rising rates layered on top of a possible deceleration in AI spending could spark a combination that finally tips the economy toward a more meaningful slowdown and one that would almost certainly be felt by the auto industry, which has enjoyed surprising resilience through most of 2026,” he said.
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