Noises in the Attic

Credit bureau Experian released a report recently about auto finance trends, and I wonder if it was equivalent to watching a horror movie when the camera follows the teenage babysitter as she tries to figure out what’s making that scratching noise in the attic. Everyone watching the movie knows that the serial killer is up there, but up she goes, completely oblivious to what’s waiting for her. 

Monthly payments, on average, are higher. The average credit scores on newly originated new- and used-car loans are lower (at their lowest point since mid-2008). Loan terms are getting longer. And the amount financed is growing, not decreasing. 

In all cases, these indicators are proof of the anecdotal evidence that credit standards among auto lenders are loosening. Taken individually, they might not be a big cause for concern. Monthly payments, for example, are $2 higher than they were a year ago. 

But analyzed in aggregate, is this a huge red flag that the auto lending industry — and the banking sector, in general — are heading down an all-too familiar path of economic disaster?

It was widely reported recently that auto loan delinquency rates are at all-time lows. This is great news and could have been taken as a sign that the cycles of the past were just that — in the past. But the data released by Experian indicates that maybe the harsh lessons of economic cycles past are going to be repeated in a year or two, when the likely byproduct of looser underwriting standards — higher delinquency and default rates — start making scratching noises in the attic. 

Credit bureau Experian released a report recently about auto finance trends, and I wonder if it was equivalent to watching a horror movie when the camera follows the teenage babysitter as she tries to figure out what’s making that scratching noise in the attic. Everyone watching the movie knows that the serial killer is up there, but up she goes, completely oblivious to what’s waiting for her. 

Monthly payments, on average, are higher. The average credit scores on newly originated new- and used-car loans are lower (at their lowest point since mid-2008). Loan terms are getting longer. And the amount financed is growing, not decreasing. 

In all cases, these indicators are proof of the anecdotal evidence that credit standards among auto lenders are loosening. Taken individually, they might not be a big cause for concern. Monthly payments, for example, are $2 higher than they were a year ago. 

But analyzed in aggregate, is this a huge red flag that the auto lending industry — and the banking sector, in general — are heading down an all-too familiar path of economic disaster?

It was widely reported recently that auto loan delinquency rates are at all-time lows. This is great news and could have been taken as a sign that the cycles of the past were just that — in the past. But the data released by Experian indicates that maybe the harsh lessons of economic cycles past are going to be repeated in a year or two, when the likely byproduct of looser underwriting standards — higher delinquency and default rates — start making scratching noises in the attic.