The growing demand for new vehicle loans was spurred on by a decline in interest rates. Bank rates fell from 5.17% to 3.76% between 2010 and 2014.
As of 2Q14, the total outstanding auto loan amount in the US hit an all-time high of $905 billion. It grew at a compound annual growth rate, or CAGR, of 6.2%—from $711 billion in 2010.
Auto loan repayment improved significantly. This clearly indicates a turnaround in consumer sentiment. Loans that were delinquent for more than 90 days decreased from 5.3% in 2010 to 3.3% in June 2014. Also, the annual net charge-off rate—the percentage of loans that banks and finance companies don’t expect to recover—dropped from 2.7% in 2010 to 2% in 2014.
Auto loan market share
During 2Q14, banks and manufacturers’ captive finance units dominated the auto loan industry with a combined share of 62.1%. Captive finance units are owned by the auto manufacturers. They usually provide vehicle financing at lower rates compared to banks. Credit unions had a 16.7% share of the market. Typically, a credit union’s interest rates are about 1.3% lower than a commercial bank’s interest rates. This makes captive finance units and credit unions’ offerings extremely competitive.
Finance companies’ market share is being eaten up by captive units. There was 4.6% growth year-over-year, or YoY, for new cars and 15.1% growth for old cars. This is good news for auto manufacturers—like General Motors (GM), Ford (F), Toyota (TM), and Honda (HMC)—since their captive finance units contribute about 10% of their revenue.
Investors can gain exposure to the auto industry by investing in the Consumer Discretionary Select SPDR ETF (XLY). The automobile and auto components industry gets 8.56% of the funds.
The percentage of vehicles with financing increased from 80.2% in 2Q10 to 85% in 2Q14. The increase fueled captive finance companies’ growth. The average MSRP (manufacturer’s suggested retail price) in the US is $33,907.
For new cars, the 4.8% increase in finance requirements resulted in $43.4 billion growth in the auto loan market in 2Q14—compared to 2Q10. Captive finance companies held a new car market share of around 50% in 2Q14. They gained business totaling $21.7 billion in a single quarter simply by increasing the percentage of vehicles being financed.
In the next part of this series, we’ll discuss the automotive industry’s crucial role in economic growth.