Yesterday, the Federal Reserve released its monthly report on consumer credit.  As expected by economists, we borrowed more money over the month of May.  This is good for the economy.  Despite popular personal finance guru advice, some debt can be good.  We’ve all learned thanks to the financial crisis that many people are perhaps not responsible enough with their borrowing.  But that still doesn’t mean a report on aggregate borrowing going up is a bad thing.

When we talk about consumer debt, home loans and credit cards almost always come to mind first.  But there’s another segment out there that doesn’t get enough attention: auto loans.  Sadly, the Fed has seemingly stopped collecting some of the most detailed data on auto lending.  But the three charts below can help us get a better understanding of how this sector of the economy has fared in recent years.

average amount finance for new car loans

This purplish chart gives us a good idea of how much we’re borrowing to buy a car.  Keep in mind, this isn’t how much car we’re buying, just the portion that we’re borrowing.  This number is frighteningly high.  In 2000, we were financing $20,000 on average, itself a scary number.  But our borrowing did nothing but get worse and somehow as the recession was ending we were borrowing on average $32k per new car.  Why were we buying so much car?  The latest number is much lower; but to be honest, we’re a country that should probably be borrowing no more than $10k for a new car.

weighted average maturity of new car loans

This green chart is showing the average maturity of new auto loans made over time.  Back in 2000, a new car loan had an average term of about 54 months.  That’s 4.5 years.  But in all that time we’ve been levering up and extending the terms of the loan.  This allows us to finance more expensive vehicles, but it takes longer to pay off.  We peaked in the middle of the crisis and have fallen back somewhat.  But even at the last measurement the number stood at 62 months, which is over 5 years.  It’s now not uncommon to finance a loan for 72 months, which is simply insane.

loan to value ratio of new car loans

This final chart is arguably the most important one of the group.  It’s showing the loan-to-value ratio of new cars.  It’s basically telling us how much of each new car purchase was financed, as a percentage of the total price.  The number was last shown at an all-time low.  At 80%, that means we were putting 20% down for new cars.  This is likely a reflection on the fact that at the time many people couldn’t get approved for a loan without putting more down. It’s good to see that this number has fallen quite a bit from a peak of 100% in 2007 and the starting rate of 92% back in 2000.  We can only hope that this number continues to improve.  But, if the recent consumer credit figures are indicative, we’re probably back up to our old tricks.

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categories: banking, cars, economics, lists, loans