2 reasons why auto loan repayments have risen 30% since 2019

The median auto loan repayment has risen 30% since 2019, according to the Bank of America Institute. Bank of America Institute senior economist David Tinsley joins Asking for a Trend to discuss how lower-income households are handling rising auto loan payments.

Lower-income households in particular saw a large increase in their monthly payments. However, Tinsley explains that the lower-end consumer remains "stable." He notes that lower-income wage growth is up about 4% year-over-year, allowing consumers to continue spending.

He attributes the rise in auto loan payments to two factors. First, are new and used car prices increased significantly during the pandemic, and are up about 25% since 2019. Secondly, the Federal Reserve's rate hikes manifested in financing rates. "Those two things together mean that if you did buy a new car or a used car and financed it over the last few years, you really have seen quite a hike in your regular auto payments," he explains.

Tinsley highlights that among lower-income households, more than 60% are paying at least $500 a month toward their auto loan. If the economy were to take a turn for the worse, he notes that these household budgets could become significantly stressed, and they may need to aggressively pull back on other areas of spending to afford their loan payments.

For more expert insight and the latest market action, click here to watch this full episode of Asking for a Trend.

This post was written by Melanie Riehl

Video Transcript

The median auto loan repayment has risen significantly since the pandemic, something about 30% compared to 2019 levels.

It's according to the Bank of America Institute.

Lower income households, particularly seeing a large increase in their monthly payments.

But as the Federal Reserve kicks off its rate cut cycle, we're looking at the road ahead for auto purchases here, discusses Bank of America Institute senior economist David Tinsley.

David, it is good to see you, um, start off more broadly, David, because you all have a lot of insight into the consumer when we talk about those lower income households, David, clearly facing a number of challenges.

I'm just interested to get your big picture.

Take OO on that lower income strata.

How are they holding up here, David?

Well, thanks for having me on.

I mean, big picture and looking beyond autos, I think we regularly, you know, publish in our consumer checkpoint piece monthly that you start with the labour market.

Really?

When you think about the consumer and the lower income labour markets, the wage growth there remains pretty solid.

I think in our data, when we look at the payrolls going into people's accounts lower income.

It's up about 4% year on year.

Spending is holding in there.

So, you know, autos and a few other areas.

There are points of tension, but I think big picture the lower income consumer is is is I say stable already right now.

So let's dig David Now into this new report you all have and how lower income households are, uh, dealing with a particularly large increase in monthly auto payments.

Walk us through that, David.

Well, you know, I guess two things happened, Really?

Post pandemic.

First, you had new and used car prices ramping early in the pandemic.

Use has come down somewhat, but both new and used prices are still up about 25% on 2019.

Then, of course, you have the fed hiking that got passed through to financing rates.

Those two things together mean that if you you did buy a new car and finance if you did buy a new car or a used car and finance it over the last few years, you really have seen quite a hike in your regular auto payments.

And just to give you an example in our data, uh, lower income households.

They used to be the case in 2019 that 60% so majority of auto loan payments monthly auto loan payments were were under $500 a month.

Now the majority over 60% is over $500 a month.

So there has been a shift in the distribution, Uh, due to those factors those prices and rates factors, so are they.

Are they able David to to keep pace with these higher auto payments?

Well, this is, in a sense, the good news.

Cos I We were referring in the in the first part of the discussion to the labour market for lower income and kind of broadly as well being fairly solid to date.

Obviously, there are few signs around the edges of softening.

But what that means is that generally, payroll pay growth has kept yeah, at in pace at pace with with our car loans.

So when we look at our data roughly speaking, compared to 2019 and 2024 auto loan payments for lower income households are roughly unchanged as a share, so that's quite positive news.

But I think where the worries are, the risks are is just say the economy tilted to the downside.

Say there was a sharper deterioration in the labour market than many people are expecting.

Then, of course, that might stretch some of these households, particularly at the lower end.

Uh, in terms of meeting these financial commitments, what they might have to do is pull back fairly aggressively on their spending in order to kind of make their loan commitments.

At that point, I think, David, great to have you on the show today.

Thanks for making time.

Thank you.