Dec. sees slight credit access boost as auto loan rates decline

Auto credit access, a measure of how easily consumers can get vehicle financing, improved in December for the fourth consecutive month.

Driving the news: Cox Automotive reports that the Dealertrack All-Loans Index reached 95.5 last month, up 0.2% from Nov. and higher from the prior year by 1.9%. While this is the highest level of credit availability since early 2023, access can still be limited depending on where consumers apply for financing.

• Credit unions drove the biggest increase in access among all lender types in Dec., sustaining trends seen throughout 2024. Automotive financing companies also saw looser requirements.

• However, captives (financing arms controlled by manufacturers) saw reduced availability, ending recent months of loosening.

Behind the scenes: While access was mixed on an individual basis, overall credit availability is still improving, encouraged by multiple factors.

• With auto loan interest rates on the decline (down 23 basis points from Nov.), car shoppers are seeing higher approval rates (up 40 basis points).

• Consumers also benefitted from a narrowing yield spread, which tightened by 25 basis points.

• These advantages negated several worsening factors, such as a year-over-year increase in negative equity and a month-over-month decline in subprime buyers, leading to better conditions overall.

Looking ahead: Consumers and dealers can likely expect credit access to continue improving for the near future as financing conditions continue to moderate following the COVID-19 pandemic.

• In fact, in Q4, Cox Automotive Chief Economist Jonathan Smoke predicted a potential full-point decline in auto loan interest rates by this year’s tax refund season.

• Assuming no economic hiccups interrupt current trends, this could lead to higher approval rates and sales volumes by mid-spring.

• Still, it is best for retailers to remain on guard. With a new administration taking the reigns, a wave of policy changes are likely to follow, any number of which could cause market dynamics to shift.

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