The US car loan industry enjoys booming demand

Powered by continued strength in US auto sales in 2014, the car loan business is expected to enjoy another year of robust growth.

With most industry observers calling for 2014 US auto sales ranging from 16 million to 16.5 million, car loans are certain to follow this upward trend, which is fueled by pent-up demand for new cars.

During the Great Recession of 2008-2009, the worst economic contraction since the Great Depression, Americans cut back on their purchases of almost everything but absolute necessities. Perhaps hardest hit by this sharp decline in consumer spending were the real estate and auto sectors.

Auto loan portfolios grow

Although both were slow to recover from the recession, real estate was by far the slowest, a reflection perhaps of the significantly larger expenditures required to buy a home. To help fill the gap in their loan portfolios, banks, credit unions and other lenders increased their auto financing business.

In mid-December 2013, TransUnion, one of America's three largest credit bureaus, announced that it expects auto finance trends to remain positive in 2014. Specifically, the credit bureau said it anticipates bigger loans, an increase in auto leasing, and easier access to credit for auto buyers.

 Average auto debt rising

TransUnion projects that the average auto debt per borrower will grow to $17,966 in 2014's fourth quarter, up roughly $1,000 from an estimated average of $16,942 in the fourth quarter of 2013.

And the credit bureau doesn't foresee a decline in this figure anytime in the foreseeable future. "Unless there is a real shock to the economy, we don't envision auto loan debt levels to drop for some time," said Peter Turek, TransUnion's vice president of automotive.

The rosy forecast for auto financing in 2014 is not without some downside. With the overall increase in car loans,TransUnion foresees a slight increase in subprime lending, which likely will lead to an increase in auto loan delinquencies. Turek said, however, that the credit bureau doesn't expect delinquencies to reach the levels experienced during the recession and its immediate aftermath.

Past due auto loans

TransUnion predicts the percentage of auto loans past due 60 days or more will climb to 1.19 percent by the fourth quarter of 2014, compared with an estimated 1.1 percent in the fourth quarter of 2013. This compares with a 1.32 average in the fourth quarters of the years 2007 through 2012.

CUNA, the national trade association for both state and federally chartered credit unions, reported that auto loan portfolios accounted for nearly half of all credit union loan growth in 2013.

Based on credit union lending data through the end of September, the auto loan portfolio expanded by $19.7 billion, 48 percent of all new lending by credit unions.

As a percentage of all credit union loans, vehicle loans stand at 30.7 percent, up from an end-2011 low of 28.7 percent but well below the pre-recession level of 33.3 percent. This would seem to leave plenty of room for growth.

Auto lending momentum

CUNA believes car loans have plenty of momentum behind them heading into 2014. "Vehicle lending's growth is forecast to remain strong, based on sales forecasts and the growing need for replacement transportation given the record average age of the existing vehicle fleet," said David Colby, chief economist at CUNA Mutual Group.

The average age of the U.S. vehicle fleet has been increasing year over year since 2002, when it was 9.8 years for passenger cars and 9.4 for light trucks, or an average of 9.6 years for all light vehicles, according toPolk, the automotive intelligence firm that is part of IHS. As of 2013, the average age of all light vehicles still on U.S. roads had climbed to 11.4 years.

Quality of vehicles improving

The aging of America's light vehicle fleet, a trend that began well before the onset of the Great Recession, is in part a reflection of the improving quality of light vehicles, both domestic and those of foreign origin that are sold in this country.

Another factor likely to keep auto financing moving ahead at a fairly rapid pace is the likelihood that interest rates on auto loans will stay relatively low.

Mike Schenk, CUNA's vice president of economics and statistics, said that slow improvements in the labor market are likely to ensure that the federal funds rate stays roughly where it was at the end of 2013. "What that says to us is that automobile loan rates will be pretty low at least through the end of 2014," Schenk said.

About the author

Jay Fremont is a freelance author who writes extensively about a wide array of business and personal finance topics.