Beneath The Auto Loan Credit Boom: A Bad Omen?

There is a fascinating post on the NY Fed’s “Liberty Street Economics” site by Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw on the recent increase in auto loan origination . Normally, this would be pretty dry, technical stuff.

This time, though, the data was interesting for two reasons, First, because it noted an increase in loans to people with marginal credit scores, a phenomenon illustrated in the graphic below, which clearly shows the increasing level of “risky” auto loans:


The authors note that loans to marginal borrowers are now at about 23%, which is only 2% points below the 25-30% range that we saw in the boom years preceding the recession.

What’s even more interesting, though, is the data shows a clear shift in the age of the typical borrowers. Pre-recesion, most car loans went to you younger people, who, as expected, had less disposable income to spend on luxury items such as cars. Post-recession, the authors note, that appears to have changed:

It appears that eighteen- to twenty-nine-year-olds are simply borrowing less frequently. While their average origination amount has caught up to pre-recession levels, they are borrowing far less frequently for car purchases than they had in the past, still averaging under one million new loans per quarter.


The only group taking out more loans than ever (at least during the time period for which we have data) are people between ages sixty and sixty-nine. However, the apparent increase in loans being originated (in both count and in aggregate balance) by this group is due in part to this population’s sheer growth as Baby Boomers reach their sixties.

So that implies that (a) there may have been a fundamental shift in car buying behavior for younger consumers and (b) the current boom will end as the Baby Boomers’s driving years also end. Does this mean that while auto demand is bouncing back now, in the long run, the outlook should be much more pessimistic? It’s an intriguing question, and one that deserves a little more investigation, since what is happening in auto may also be happening in other sectors, which could signal a major shift in buying patterns among younger consumers that will continue to become evident as the US climbs out of recession.

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Carlos Alvarenga

Founder and CEO at KatalystNet and Adjunct Professor in the Logistics, Business and Public Policy Department at the University of Maryland’s Robert E. Smith School of Business.

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