Auto loans mean banks don’t need high interest rates to collect money


Ally Financial was the last bank to report a large profit windfall in its second quarter earnings report, as the largest auto lender in the US banking industry reported a 67% increase in profits.

Why is this important: Americans are borrowing record amounts to buy new – and used – vehicles, and they continue to pay relatively high interest rates. The banks are thus making big profits.

The plot: US Treasury yields fell to their lowest level in more than 2 years, pushing down interest rates on bonds and savings accounts. Yet the Fed the data shows Second-quarter auto loan rates have remained well above their average for the past decade, and even higher than in the fourth quarter of 2018, when Treasury yields hit their highest level since 2011.

  • The interest rates that banks charge for loans are usually tied to the yield on treasury bills, as banks adjust their rates according to changes in the bond market to remain competitive for customers.
  • However, as rates in the United States and around the world fell in 2019, this traditional correlation has yet to materialize.

What is happening: American consumers are reduce on new vehicle purchases and even buyers with prime credit opt ​​for second-hand rather than new, the data shows, but the banks continue to rake in big profits.

  • Ally stock rose 6.5% to an all-time high of $ 33.49 billion on Thursday, as retail auto loans hit $ 72.3 billion, from $ 69.9 billion one year earlier. Its average yield on retail auto loans fell from 6.08% to 6.58%.

Where he is : Experian, which tracks millions of auto loans each month, said the average amount Americans borrow for a new vehicle hit a record high of over $ 32,000 last month.

  • Americans also pay record average monthly payments for new and used vehicles.

“We haven’t seen a slowdown in demand for loans. In fact, the volume of new and used loans is up from previous years, ”said Melinda Zabritski, senior director of automotive financial solutions for Experian, told CNBC in June.

The bottom line: Investors fear that the drop in rates will affect profit margins and bank revenues. So far, this has not been the case.

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