Risk of a credit crisis in auto lending and the broader U.S. financial market remains low

The auto market in the U.S. has roared back to life since the Great Recession. At 16.4 million units, the final 2014 new car sales tally marked the highest level seen since 2006. The momentum has continued into 2015, with the seasonally-adjusted annualized rate averaging 16.7 million units through the first five months of the year. 

While higher sales are certainly a welcome development for the U.S. economy, some eyebrows have been raised surrounding the lending practices within the industry. In particular, the resurgence of subprime lending and the shift towards longer loan terms has triggered concern among some market watchers.

However, looking more closely at the data reveals that the share of subprime auto loans has held steady, delinquency rates remain low, lenders are now much more prudent in their underwriting practices and recent deleveraging has put households in a better position to keep up with their financial obligations. Moreover, while loan terms are lengthening, the biggest risk occurs if consumers trade in the vehicle early in the cycle and wrap the remaining balance into a new loan. 

"Many lessons can be learned from the financial crisis, on both the lending and the borrowing side, as the consequences of inappropriate underwriting practices can still be seen throughout the economy.  However, there are many differences between pre-crisis lending in the housing market and the current state of auto lending. Overall, it appears as though the risk of subprime lending and longer loan terms having a catastrophic impact on auto credit and the broader financial market is quite low." notes TD Economics