KBRA Financial Intelligence

Auto Lending Struggles to Regain Traction as Tariffs Loom

Auto loans held by U.S. banks are amid a significant retraction. While a year-over-year (YoY) decline of 2.3% in 4Q 2024 was the smallest in over a year, the momentum appears to be facing headwinds. The seasonally adjusted annual rate of vehicle sales calculated by the U.S. Bureau of Economic Analysis (BEA) slumped by 6.9% in January, marking the steepest drop since May 2022. Although sales rebounded slightly in February, they remain almost 5% off the pace set at year-end 2024.

Delinquencies are traveling in the opposite direction, with the average rate of auto loan delinquency among U.S. banks jumping 19 basis points (bps) from the previous quarter—the steepest increase since 4Q 2019. KBRA Financial Intelligence (KFI) data indicates that average auto loan delinquencies have surpassed the five-year moving average in four of the past five quarters, including the latest. Despite the accelerating increase in delinquencies at most U.S. banks, data from the Federal Reserve’s latest Senior Loan Officer Opinion Survey (SLOOS) indicated that the net percentage of domestic banks tightening standards for auto loans fell 3.8% in 4Q 2024—the steepest decline recorded since 2Q 2022. Although the Fed described the change in auto loan standards as “basically unchanged” among all banks surveyed, a closer look shows that almost one-quarter of large banks (defined as those with total domestic assets of $100 billion or more) stated that their credit standards had eased slightly.

Although a 15% YoY decline in January auto inventories might suggest that the worst is over for auto sales and lending, part of that shrinkage can likely be chalked up to an ongoing slump in the output of new vehicles. U.S. BEA estimates indicated that domestic auto production in January reached its lowest level since September 2021. Further declines in auto inventories could be on the horizon if President Trump expands new tariffs on Mexican and Canadian goods to include imports from General Motors, Ford, and Stellantis, which have largely been shielded from such duties by the United States-Mexico-Canada Agreement (USMCA) since 2020.

Until April 2, American automaker vehicles assembled in Mexico or Canada that meet manufacturing and parts requirements can be exported to the U.S. tariff-free. However, the President has stated that this exemption is temporary and new “reciprocal” duties will be introduced. American automakers maintain a significant manufacturing presence in Mexico and Canada, making them the top two exporters of transportation products to the U.S. Tariffs impacting European Union (EU) autos exported to the U.S. market are likely to follow. A reciprocal tariff rate with the EU would raise the current 2.5% import duty on European vehicles entering the U.S. market to 10%.

Tariffs impacting a huge chunk of U.S. auto imports could slash affordability. The latest data from the Fed put the average rate on a new 60-month auto loan at 7.8% in November, easing slightly from a series high of 8.4% last August. The rate may have declined further during the January to March period, in tandem with mid- and long-term U.S. treasury yields. President Trump has mentioned that he would like to “make interest payments on car loans tax deductible,” so long as the vehicle is made in the U.S., which would effectively cut the financing cost of autos even further. However, the sticker prices of new and used vehicles have begun rebounding sharply following a period of deflation in early 2024. The Consumer Price Index (CPI) measure of new and used motor vehicle prices has posted month-over-month increases for each of the past seven months through February. If implemented, tariffs could drive further price increases, potentially making financing more challenging for some banks and consumers.

KFI users can sort by loan categories and the delinquency rate impacting those loans for all banks and credit unions via KFI’s web application, the Data Wizard in KFI’s Excel add-in, as well as the Loan Category and Delinquency Report template from our Template Library. To access our full library of tables and templates, request a demo today.