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The latest report released from The Federal Reserve Bank of New York on U.S. household debt and credit for the third quarter reveals two key takeaways on auto loans. First, Americans continue to take on more new debt to buy or lease cars at increasing numbers. Second, financial institutions are raising the credit standards that determine what auto loans they approve.
Within the third quarter of 2019, the total number of auto loan originations within the U.S. — the amount of money for new auto loans or leases — rose to $159 billion, the second biggest ever reported. The total U.S. household debt also rose — for the fifth year in a row — to $13.95 trillion in total.
Also, the median credit scores for borrowers who were approved for new auto loans rose to 711, up from 703 in the second quarter.
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There’s high demand for auto loans within the market. But those looking for loans might need higher credit scores to increase the likelihood of approval.
Even as the number of auto loan originations rise, lenders are getting pickier about the credit scores they want from borrowers. The median credit score for new auto loans within the third quarter was 711 — meaning many borrowers applying for auto loans had credit scores in the “good” range or better.
So why are lenders giving more auto loans even though their lending standards are rising? There are a couple of possibilities. For one, auto loan interest rates may be lower for new loans now than they would have been earlier in 2019. This is because the Fed cut its federal funds rate three times in the second half of the year. When the Fed cuts rates, lenders may opt to lower their interest rates for several of their loan products.
Another possible reason that the number of originations has increased is the rise of auto prices. Under this explanation, it’s not necessarily the case that more people are buying or leasing cars. Rather, those who want vehicles are now paying more for them than they would have in the past. This could then drive up the total balance of auto loan originations even if the number of loans holds relatively steady.
Based on what this latest data tells us, the trend showing an increase in auto loan originations within the third quarter of 2019 may likely continue over the next few quarters, as long as Federal interest rates remain steady — or fall lower. It could also continue if auto prices stay high or rise even more.
If you’re in the market for a vehicle in the near future, a good first step could be taking a look at your budget and figuring out how much car you can afford. That could give you a sense of what kind of auto loan is right for you.