Ford CFO reports rising auto loan delinquencies

A rise in auto loan delinquencies, or late payments, could be the next signal that the U.S. economy is headed for a potential recession, according to a new warning from Ford Credit, the automaker’s financing arm.

“We are seeing delinquencies starting to increase,” Ford Chief Financial Officer John Lawler said Wednesday at the Deutsche Bank 2022 Global Automotive Conference. “It’s not a concern for us yet because at the end of last year and in the first part of this year they were very low. It looks like we’re getting back more towards the average.”

“We’re looking for every indication and every data point we can as to where the consumer is, where they’re headed given everything we’re seeing out there, inflationary pressures, economic issues, etc.” , did he declare. continued. “So we’re seeing a bit of headwinds there in terms of delinquencies as maybe a leading indicator.”

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F FORD MOTOR CO. 11.26 -1.01 -8.23%

Automotive research firm Edmunds reported that the average monthly consumer auto loan payment hit a record high of $656 for new vehicles and $546 for used vehicles in May. The average annual percentage rate for new vehicles reached 5.1%, the highest level since March 2020, and the average loan term for a used vehicle reached a record 70.8 months.

These borrowing costs are expected to rise even further as the Federal Reserve raises interest rates to tame searing inflation.

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On Wednesday, the Fed raised rates by 75 basis points for the first time in nearly three decades and charted an aggressive rate hike path for the rest of the year. New economic projections released after the Fed’s two-day meeting showed policymakers expect interest rates to reach 3.4% by the end of 2022, which would be the lowest level high since 2008.

Federal Reserve Chairman Jerome Powell speaks during a press conference following an Open Market Committee meeting at the Federal Reserve Board Building, Wednesday, June 15, 2022, in Washington. (AP Photo/Jacquelyn Martin) ((AP Photo/Jacquelyn Martin)/AP Newsroom)

“As Fed rate hikes continue, automakers will find themselves in a bit of a difficult position because lower interest rates will be a costlier marketing incentive at a time when consumers are more reliant on interest rates. lower interest to combat rising prices,” the Edmunds executive said. ideas director Jessica Caldwell said in a statement.

“While the used market has been quicker to reflect these increases, the fact that the new market is now squeezed without supply chain issues clearly being addressed means car buyers are going to face an even tougher market. With auto loan delinquencies expected to rise, it’s now more important than ever for car buyers to understand the risks associated with financing more than they can afford. afford.”

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Despite the latest headwind, Lawler noted that consumer demand for Ford vehicles remains strong. The company is working to cut costs to offset inflation, raw material and supply chain pressures.

“Given the environment we’re in, I don’t think you’ll see a lot of extra prize money,” he added. “If there’s one area where I think we still have some ability to price, it’s our electric vehicles. But we’ll think about that a lot.”

As Ford has begun to model possible scenarios in the event of an economic downturn, Lawler pointed out that the company and the broader auto industry are in a very different position from previous recessions, where stocks and incentives to exit older models are usually high.

“We are very lean on inventory. We have a large order bank with over 300,000 units,” he explained. “So it’s a completely different environment heading into what could be a potential recession than anything I’ve seen in the past.”

Ford Motor Co. F-150 pickup trucks for sale at a Ford Motor Co. dealership in Colma, California, U.S., on Monday, Feb. 1, 2021. Photographer: David Paul Morris/Bloomberg via Getty Images (David Paul Morris/Bloomberg via Getty Images)

In addition to auto loan delinquencies, Ford closely monitors the prices of used trucks, large vehicles and SUVs. In May, used car prices jumped 16.1% year over year, according to consumer price data from the Bureau of Labor Statistics.

Ford shares, which fell more than 8% in Thursday’s trading session, are down more than 45% year-to-date.

Fox Business’ Megan Henney contributed to this report.

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