The historic high that the U.S. auto debt is at — according to the latest quarterly report from the New York Federal Reserve — is “not necessarily a problem” considering the U.S. market’s need to update its aging vehicle fleet, said Carlos Gomes, senior economist and auto industry specialist at Scotiabank.
Auto loan debt balances grew by $22 billion in the fourth quarter up from a $19 billion increase during the same period the year prior, the New York Fed reports. It may have grown the auto finance industry to a $1.16 trillion peak in 2016, but some remain concerned about rising delinquencies and what would happen to all that debt if the economy took a turn for the worst.
“The reality is that the economic backdrop is doing the the exact opposite — we are seeing things improve not deteriorate,” Gomes told Auto Finance News. “Interest rates have come down dramatically and energy prices have also come down significantly giving people the additional disposable income to go out and spend on items such as vehicles where they were very constrained a decade ago.”
Consumers are willing to take on extra debt to upgrade, he added. The average vehicle in the U.S. is now a record 11.6 years old, Gomes said citing data from The R.L. Polk Company. That means 40% of cars on the road today, or more, are 12 years old or older, he estimates.
“Significant aging of the fleet and replacement demand continues to strengthen,” Gomes said. “Because of improving consumer fundamentals, consumers are enabled to go out and replace that fleet, which in prior years may have been more difficult.”
However, despite a good economic climate, new car prices continue to rise. Last year, Bankrate.com found that in many major cities the average new car price — $34,000 according to Kelly BlueBook — was far higher than the affordability range of median income households in those cities.
New cars are more expensive today because of added technologies and safety features, but those prices have also raised U.S. auto debt to historic highs.
“When you look at the U.S. auto market, we used to have auto sales averaging close to 17 million units between 1999 and 2005 and here we are 12 years later and a lot of those vehicles are still on the road,” Gomes said. “Now, people need to buy new vehicles and I think that’s really the key driver of the auto sector over the last few years and will continue to be.”
