Big banks warn of auto loan problems as used vehicle prices erode

America’s biggest banks are warning of trouble ahead in auto lending as falling prices for used vehicles risk leaving borrowers underwater.

Wells Fargo & Co. said higher loss rates for loans it issued late last year contributed to higher write-offs for the period. Ally Financial Inc., the nation’s second-largest auto lender, saw write-offs for retail auto loans quadruple in the third quarter. And Fifth Third Bancorp said it was pulling out of originations.

Used car prices fell 7% in the third quarter, the worst drop since the depths of the global financial crisis, according to data compiled by the vehicle auction company Mannheim. The risk, investors fear, is that if consumers end up owing more than their car is worth, they could stop making payments and let the vehicles be repossessed.

“There’s been a real margin squeeze on new car production, on the one hand, and on the other hand, there’s been a drop in used car prices,” said Tim Spence, CEO of Fifth Third, in an interview. “It made us slow down the production” of loans a bit.

Ally warned investors that net charge rates could climb to 1.6% next year from 1.05% in the third quarter. Still, rates remain below their pre-pandemic levels, and CEO Jeffrey Brown has been adamant that the giant lender doesn’t need to pull originations.

“We’re still very pleased with the new loans we’re making today,” Brown said. “We are constantly cutting margins where we see additional pockets of risk. The analytics behind that are very robust – we have weekly credit conversations and buy box adjustments – so it’s a very fluid environment. “