Garnet Capital Advisors Blog

When it comes to sensitivity to interest rate changes, few parts of the loan market respond as quickly as the auto sector.

So whether the Federal Open Market Committee begins tightening benchmark interest rates at its September meeting or it waits for its confabs in October or even December, you can be sure change is coming soon to auto loan portfolios.

Real effect on pocketbooks
Let's say auto-loan rates rise from 3 percent to 6 percent. That would reduce car buyers' ability to pay by $2,500, according to figures from AlixPartners LLP. Should auto loan rates hit 10 percent, consumer purchasing power would take a $5,250 hit. At least publicly, big auto executives aren't worrying about interest rates finally nudging up. General Motors' president, Dan Ammann, said before the Fed's September meeting that it was "time for a raise." Further, he said a hike would be a "vote of confidence in the economy" that won't drag down car sales.

Cheap gas fuels loan boom
Nearly a decade of essentially-zero interest rates has combined with other factors to heat up the car loan marketplace. Cheap gas has played a large role in convincing more U.S. residents to borrow money for new wheels. More evidence of the continued decline in gas prices came in the Labor Department's most recent report on consumer prices. Gas prices fell a striking 4.1 percent in August from already low levels. The national average for a gallon of unleaded stood at just $2.30 as of Wednesday, Sept. 16.

Tons of car loans
Money owed on cars rose above $1 trillion for the first time last month, the Wall Street Journal reported. Enough families are making the decision to take on an auto loan to drive vehicle sales of 17 million units this year. That'd be the most since 2001. Strong demand for car loans helped boost overall consumer credit levels, according to a recent Fed report. Geographies singled out as particularly car-loan crazy included Chicago, Atlanta and Philadelphia.

Are auto loans overheating?
While regulators have sounded alarms about declining standards for car loan underwriting, by some measures the quality of auto loans is also improving. American Banker noted that non-performing loans are down in the auto sector - not to mention all other loan categories except commercial and industrial. However, subprime loans are making up a higher percentage of the bundled instruments being sold by Wall Street. J.P. Morgan reports securities backed by car loans rose 9 percent over the past year to almost $70 billion, with $21 billion of that buttressed by subprime paper.

Takeaways for loan portfolio management
From an economy-wide perspective, auto sales themselves don't drive much growth. The Wall Street Journal cited Commerce Department figures that four years' of increased car production added a scant 0.27 percentage points to the U.S. growth rate of 2.1 percent. But for loan portfolios at individual banks, the changes can mean a great deal.

As interest rates rise, experts from loan sale advisory firm Garnet Capital Advisors can help banks strategize about what moves to make with the auto loan portions of their portfolios.