Bank earnings expose a growing divide in auto lending

A mixed bag of Q3 earnings saw some lenders stay aggressive with new loans while others pump the brakes to limit their exposure. But the big takeaway? Borrowers are feeling the pinch. More are falling behind on payments, and options for refinancing or trading for cheaper cars are drying up fast.

Why it matters: Auto loans have traditionally been among the last bills consumers let slide—missing payments point to deeper financial distress. And as more borrowers fall behind, both lenders and dealerships are finding themselves caught in a tightening credit environment.

By the numbers:

• Bank of America: $7.9B in originations (+16.2% YoY)

• Huntington Bank: $2.4B in originations (+71.4% YoY) through dealer channels

• Ally Financial: $9.4B in originations (-11.3% YoY)

• Wells Fargo: $43.4B portfolio (-14% YoY)

What’s happening: Auto lenders like Huntington Bank are using indirect lending through dealerships to grow their portfolios. Meanwhile, Ally and Wells Fargo are scaling back, betting that fewer loans will shield them from rising defaults.

What they’re saying: “We’re all dealing with elevated loss content across our vintages, but in particular, with the 2022 vintage. And that was a large vintage for us here at Ally,” said Russ Hutchinson, CFO of Ally Financial.

Ally reported a troubling rise in late-stage delinquencies—accounts over 60 days past due. It also saw higher-than-expected charge-offs or debts unlikely to be recovered.

The pressure on borrowers: Many car owners locked into loans at the height of the pandemic-era car price boom, when both new and used vehicles were at record highs. Add rising interest rates into the mix, and their monthly payments are now eating up more of their budgets than ever before.

• 17.4% of buyers now face monthly car payments over $1,000—compared to just 4.3% in 2019.

• 24% of borrowers owe more on their car than it’s worth (up from 18.5% last year), leaving them upside-down on their loans.

• Total auto loan debt climbed to $1.6T in Q2—an increase of $10B from the prior quarter, suggesting consumers are borrowing more to afford vehicles.

Between the lines: Borrowers with underwater loans can't sell or trade in their cars without losing money. This lack of flexibility has frozen many out of the used car market. Usually, people would trade down to a cheaper vehicle to manage high payments.

Delinquencies keep climbing: As borrowers fall behind on payments, lenders are tightening credit to minimize future losses. The New York Fed reported that 8% of auto loan balances were newly delinquent in Q2, marking a return to pre-pandemic levels.

• Rising delinquencies, particularly in the subprime segment, could force lenders to tighten credit even further.

• This would cut off high-risk borrowers from the market, which would be a major blow for used car dealerships that rely heavily on subprime financing to move inventory.

The bottom line: Borrowers trapped in high-interest loans have few options to escape their financial strain, just as some lenders pull back from issuing new loans. This leaves dealerships in a bind—slowing loan approvals means fewer buyers in the market, making it harder to move inventory.

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