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Rising car prices means more auto loan debt

Earlier this month, the Bureau of Labor Statistics released data regarding changes to the Consumer Price Index (CPI), which is one measure of inflation. The increasing cost of automobiles continues to be a major component of inflation, as many manufacturers face difficulties procuring chips that are a key component in cars and are therefore producing fewer new cars. While the chip shortage has caused new cars to grow more expensive, the price increase of used cars has been sharper. Data show that the CPI for used cars and trucks increased 40 percent since January 2021 while the CPI for new cars increased 12 percent. As car prices continue to rise, loan amounts are rising, and loan lengths are growing to make those larger loans seem affordable.

As a result, we expect that both the total amount of debt and the average loan size will continue to increase and that larger car loans will put increased pressure on some consumers’ budgets for much of the next decade. Auto loans are already the third largest consumer credit market in the United States at over $1.4 trillion outstanding , double the amount from 10 years ago and expected to grow further. We are also concerned that current high auto prices, especially for used cars, might create incentives for lenders to repossess cars more quickly than would have occurred before.

For many, their car or truck is essential to get to work or to do their work. Therefore, as the economic recovery continues, we will focus on ensuring a fair, transparent, and competitive auto lending market in the following ways.

Ensuring affordable credit for auto loans

When loans are affordable, consumers can repay the loan and continue to use their car. When loans are made at the edge of (or beyond) a consumer’s ability to repay, any economic disruption in the consumer’s life can result in repossession. Given the increase in loan amounts, the rising length of loan terms, and the uncertainty around the ongoing economic recovery, we will be closely monitoring lender practices and consumer outcomes. In particular, we continue to evaluate lending structures where lenders seem to rely on high interest rates and fees to profit even when consumers fail.

We are also concerned about loan-to-value (LTV) ratios in the auto loan market. While LTV ratios have dropped in the past year for consumers who already had cars due to high used vehicle prices, LTVs were climbing prior to the global vehicle shortage. We expect that trend to resume once price pressures abate. We will continue to monitor the market as pricing issues persist.

Monitoring practices in auto loan servicing and collections

The current economic recovery is uneven, and some consumers have been hit harder economically due to the pandemic. We want to ensure that incentives are aligned between servicers and consumers, that servicers are making accommodations available to all consumers and that servicer practices treat consumers fairly. We will also continue to work with our federal agency partners to ensure that the special protections offered to our servicemembers are followed and enforced.

Technology continues to shape auto loan servicing and collections, but with that comes questions about the effect on consumers. It is now less costly to repossess a car because many lenders require the use of some of these technologies. For example, some lenders require access to GPS locators so that they always know where a car is physically located, require the installation of technology that blocks a borrower who has missed even one payment from starting the car, or use license plate recognition (LPR) technology to find cars on repossession “hot lists”.

We are concerned that the use of these technologies may disproportionally impact certain communities, and we are taking steps to better and fully understand their impact, including privacy concerns associated with them.

Fostering competition among subprime lenders

Consumers with prime credit scores typically have many financing options, including borrowing directly from lenders. This provides them more leverage to negotiate interest rates. On the other hand, consumers with subprime credit scores often get loans indirectly through a smaller pool of lenders that operate exclusively through dealers or from buy-here-pay-here (BHPH) dealers that specialize in subprime lending. The result is less comparison shopping, fewer options, and less leverage to negotiate the interest rate.

CFPB research shows that the average subprime auto loan interest rate is between about 9 percent and 20 percent annually , depending on the type of lender. This variation has a large impact on consumers. Our report estimates that typical “shallow subprime” small BHPH borrowers would save around $894 over the life of a loan if they could reduce the interest rate from 13 percent, which is typical for such BHPH borrowers, to 9 percent, which is typical for bank borrowers with similar default rates.

We are looking to better understand potential barriers to competition in the subprime auto lending market that may drive these and related outcomes. We will continue to research auto lending policies and practices that may hinder a fair, transparent, and competitive market. And, we will work with our counterparts at the Federal Trade Commission and the Federal Reserve Bank Board of Governors to use our collective authorities to address issues in the market.

Given the steep rise in costs to purchase an automobile, it is critical that America has a well-functioning auto lending market. We will keep the public updated on changes to the market and the actions we are taking to ensure the market is working fairly for all Americans.

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