Auto Financing 2023: Riding the Wave of Rising Loans, High Credit Scores, and Pent-up Demand Amid Growing Delinquency Concerns

Current trends in automobile financing for 2023 include:

1. Growth in Auto Lending: Despite slower growth in most types of consumer loans, auto lending is expected to increase by 4.6% from the 2022 total. This growth is largely expected to occur in the second half of 2023. This is due to constraints in the supply chain easing and the production of new cars picking up, which will increase the inventory of cars available to buy​¹​.
2. Higher Vehicle Prices and Larger Loan Amounts: With the rise in vehicle prices, loan amounts have also increased. As of the second quarter of 2022, the total consumer auto loan debt was $1.50 trillion, up $0.13 trillion in just six months. This trend is expected to continue, leading to larger loan amounts for consumers​²​.
3. Rising Delinquency Rates: While auto lending is growing, delinquencies are also expected to rise, with rates projected to peak in the final quarter of 2022 and then persist at an elevated level through 2023. This increase in delinquencies is expected across all types of lending categories due to insufficient growth in wages and potential job cuts​³​.
4. Competition and Pricing Pressure: There’s increased competition in the sector, causing some lenders like Capital One to pull back, not due to deteriorating credit quality but due to competitive pressure on pricing. Some lenders are making auto loans less profitable even as interest rates rise, which could impact the auto financing market dynamics​⁴​​⁵​​⁶​.
5. Rising Average Loan Amounts and Monthly Payments: Higher prices and interest rates have led to an increase in average monthly payments across all credit tiers of 13% to 19% year-over-year. The average new auto loan amount is at a record high of $40,290, with year-over-year growth in average used auto loan amounts rising to 18.66% in 2022​⁷​.
6. Increasing Credit Scores of Borrowers: The average credit scores of borrowers are at historical highs: 738 for new and 675 for used vehicles. This has resulted in a growth in auto loans to less risky prime and near-prime borrowers, while riskier loans to lower-credit-score borrowers have decreased​⁸​.
7. Pent-up Demand: Many consumers had put off car purchases during the pandemic, which kept inventory low and sent prices soaring. However, as car prices ease and a mild recession takes hold, pent-up demand is expected to kick in​⁹​.