Since the Fed began increasing interest rates in 2022, economists, financial media and American consumers have been on "recession watch," scanning the horizon for signs of an economic downturn. The auto industry — with its finger on the pulse of consumer confidence, interest rates, employment and many other economic indicators — is frequently the subject of these scans. In recent weeks, these watchers have zeroed in on the recent uptick of auto loan delinquencies.
As inflation continues to place excessive pressure on financially stressed customers, recession watchers are seeing storm clouds. This conclusion, however, does not account for the nuances that point to a silver lining of resilience amid uncertain times. Santander Consumer's experience has shown the recent uptick in delinquencies has not resulted in a proportional rise in charge-offs.
What we are witnessing in auto lending is less of an abnormal increase in delinquencies as much as it is a return to pre-pandemic norms — a process that continues after years of disruption. The pandemic's impact on the auto market was widely felt as surging demand — coupled with supply constraints — sent vehicle prices soaring. Auto prices have been slow to return to the mean, signaling continued strength in the sector and helping keep delinquencies from rolling to charge-off. The Manheim Used Vehicle Value Index increased by 8.6 percent in the first quarter of this year, ending March at 238.1, compared with 154.8 in March 2020.
The persistence of auto prices reflects the overall strength of the U.S. labor force. As employment remains high, so too will the demand for vehicles. Americans need to be able to get to work, and for the majority, a vehicle is the only practical way to do so.
New research by Santander reinforces this link between employment and vehicle demand, as middle-income Americans largely depend on autos for their continued financial well-being. Our survey of middle-income Americans found more than 3 in 4 (76 percent) say vehicle access is critical for their job security, and nearly3 in 4 (73 percent) say access to a vehicle affects the job opportunities available to them. With less than half of middle-income Americans having daily access to public transportation, our survey found an overwhelming majority are willing to sacrifice other budgetary items to maintain vehicle access.
Because most vehicle purchases are made possible through auto lending, these findings highlight the essential role that lenders play in delivering reliable service and support for customers working through financial difficulties so they can stay in their vehicles. Our role as lenders is not just about helping our customers finance their vehicles; we are supporting our customers' ability to access the transportation they need to secure their own financial well-being in an uncertain landscape. As conditions tighten, this work is more important than ever.
