Amid high interest rates and dealer concerns about affordability, the volume of newly originated auto loans and leases fell slightly in the third quarter to $179.3 billion, down 3.3% vs. a year ago, according to the New York Federal Reserve.
That makes three quarters in a row, and five out of the past six quarters, originations fell relative to the year-ago quarter, according to the recently published New York Fed’s third-quarter Household Debt and Credit Report.
Third-quarter auto originations also followed a trend of lower volume and lower share for borrowers with lower credit scores. Auto originations in the report included new and used vehicles, loans and leases.
For borrowers with subprime credit histories, defined as credit scores below 620, origination volume was $28 billion in the third quarter, down 7.6% vs. a year ago, the report says. The quarter’s subprime share of total originations was 15.6%, down from 16.3% a year ago. It was 18.9% in the third quarter of pre-pandemic 2019.
In their third-quarter earnings reports in October, publicly traded new-vehicle retail chains say new-vehicle buyers with good credit scores – x- which is to say, most new-vehicle buyers – are having no trouble getting financed or affording add-on products such as extended-service contracts.
The megadealer groups say -high interest rates hurt dealerships the most is among used-vehicle buyers on a budget or with lower credit scores.
Such borrowers generallyget financed, but sales penetration in the F&I department may be down for add-ons. And to get deals done, dealerships may accept less profit on dealer reserve – the portion of the customer’s interest the dealership gets for acting as a middleman on finance contracts.
Group 1 CEO Daryl Kenningham says in an earnings conference call that for borrowers on a budget, the Houston-based chain lately has lost more profit on dealer reserve than on F&I products.
On average, Group 1 says it gets about two-thirds of its F&I profit from products and about one-third from dealer reserve. The publicly traded groups also say most of their F&I profit comes from product sales. Historically, it was the other way around for most dealerships.
Lenders have strict ceilings on dealer reserve. And since the middle of the last decade, some auto lenders and dealer groups have substituted a fixed fee instead of a dealer reserve that may vary from customer to customer.
In part, that’s because the Consumer Financial Protection Bureau has held that a dealer reserve that varies from customer to customer can have a so-called disparate impact on legally protected classes of borrowers, including minorities – that is, in some cases the bureau says the protected groups have been charged more.
Meanwhile, researchers for the New York Fed say they’re keeping an eye on whether younger borrowers carrying student debt can stay current on their monthly bills, since COVID-era federal forgiveness of student loan payments ended Sept. 1.
So far, it’s too soon to tell what effect the resumption of student debt repayment has had on delinquencies in other credit categories such as auto loans, credit cards or mortgages, the Fed researchers say.
But the shift to less-risky loans is a definite trend in the auto finance industry. In the third quarter of 2023, the “super-prime” tier of credit scores 760 and higher was the only category where origination volume and share increased, according to the credit report.