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Auto loans hit new high--or not

[May 9, 2011.]

 

Friday saw the release of the Federal Reserve's latest monthly analysis of consumer credit. It showed that overall borrowing increased by $6 billion in March, the sixth month running that had seen a rise. For only the second time in more than two years, credit card debt rose, though by just $1.9 billion.


More interestingly for those interested in cars, the total outstanding in non-revolving credit (fixed-term lending such as auto loans and those for mobile homes, education, boats, trailers and vacations) jumped by $4.1 billion, from $1.6253 trillion to $1.6294 trillion. That sounds good (assuming you think that the higher debt that many think is fueling the economic recovery is good), but it's not as straightforward as it sounds.


Auto loans figures confusing


Normally, auto loans are the single biggest component of non-revolving credit, and that may explain why Bloomberg ran the headline, "Consumer credit in U.S. increased $6 billion on auto loans, car purchases." But read further down the Bloomberg story, and you discover: "The increase in non-revolving debt was led by an unadjusted $6.2 billion rise in federal government lending for education."


Er, hang on. Non-revolving credit increased in total by only $4.1 billion. If $6.2 billion of that was entirely down to education, then that means (unless an awful lot of people decided all at once to pay off their mobile homes, boats, trailers and vacations) that the amount borrowed for auto loans was actually down that month.


This seems quite likely. Bloomberg quotes auto industry reports that vehicle sales dropped from a 13.38 million annual rate (seasonally adjusted) in February to 13.06 million in March. So why the headline?


Auto loans data: probably a blip


This auto loans news blog has been saying for some time that the current feast of cheap loans can't last for ever. If the economy tanks again, then there is likely to be another famine. If it continues to recover, you can eventually expect higher interest rates.


New Labor Department employment data, released on Friday, show that 244,000 jobs were added to the payroll in April. That figure, together with two reports, published Wednesday and Thursday by leading credit bureaus, suggest that the latter is the more likely scenario.


Cheap auto loans to be more widely available?


The first report, from Equifax, included the following quote from Michael Koukounas, one of the company's senior vice presidents:



"Across multiple loan products, we are clearly seeing indicators of sustained credit growth - most notably within automobile finance and bankcard originations. Consumer behavior is now fueling much of this improved loan performance as borrowers are more aggressively paying off their outstanding debts, which is positively impacting their credit risk scores and making them more attractive to lenders. If this trend continues, I would expect to see a further loosening of available credit."



These sentiments were almost precisely echoed by Chet Wiermanski, who's the global chief scientist at TransUnion, the other credit bureau to publish a report last week. He said:



"The broad and steady decline in the [TransUnion] Credit Risk Index, coupled with a moderate decrease in the demand for credit over the previous year suggests that consumers continue to live within their means, tending to acquire new credit only for larger, specific purchases. The percentage of consumers delinquent on any credit account has returned to the level immediately preceding the Great Recession."



Cheap auto loans to become less cheap?


If these two gentlemen's analyses turn out to be correct, then it seems likely that the current wide availability of auto loans may continue. However, if your blogger's (and most economists') forecast of higher interest rates in the medium term or sooner is also correct, then the time available to find cheap ones may be limited.


Those who wish to act before rates rise can find competitive auto loans quotes on this site.

 

About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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