Americans in the U.S. owe a collective $1.07 trillion in debt on their vehicles, according to Experian, a financial-services company that tracks and reports credit trends for consumers and companies. The amount is a record high, and as interest rates increase, and monthly payments become less affordable, it could create headwinds for lenders, including Ally Financial (NYSE:ALLY), and automakers, including Ford (NYSE:F) and General Motors (NYSE:GM).

A growing problem

Auto loan demand has been an important source of revenue for lenders and automakers. However, rates are increasing now that the Federal Reserve is tightening rates, and that could pose a problem for cash-strapped consumers. According to Bankrate, the average interest rate on a 60-month new-car loan has increased to 4.44%, from 4.27% in the middle of December.

A car that's made out of money.


Experian reports that the average new-car loan in the fourth quarter increased to $30,621 -- a record -- and that average monthly car loan payments climbed to $506 per month, up from $493 per month the year before.

Increasing costs are forcing borrowers to embrace auto loans with longer financing terms, too. About 32% of borrowers chose a 73- to 84-month loan last quarter, up from 29% in Q4 2015.

Despite stretching payments out over more months to lower the monthly bill, the percentage of delinquent auto loans is on the upswing. Across all auto loans, 30-day delinquencies edged up to 2.44% in Q4 2016 from 2.42% in Q4 2015, and 60-day delinquencies edged up to 0.78% from 0.71% year over year.  According to Bloomberg, delinquencies among borrowers with low credit scores is the highest since 2009.

What's at stake

A low-interest-rate environment has been very good to lenders and automakers, and rising rates could put a crimp on their revenue growth.

This week, Ally Financial, a major auto lender, issued guidance for EPS growth of between 5% and 15% in 2017, a wide spread that's weighed down in part by an increase in its provision for bad debt.

In 2015, Ally Financial's loans to people with credit scores south of 660 represented about 45% of its loan origination, and last year, that figure fell to 41% as management began to limit its exposure to risky borrowers. 

Despite tightening standards, Ally Financial expects losses on loans to increase to between 1.4% and 1.6% of its portfolio, up from 1.24% in 2016. Since Ally Financial has $66 billion in retail auto loans outstanding, and it originated 5% of all auto loans last year, investors will want to keep close tabs on how delinquency and charge-off rates progress at the company this year. If they pick up, Ally Financial could have a tougher time making its forecast.

The dynamic could also strain Ford and General Motors, both of which have seen revenue climb significantly over the past few years.

F Revenue (TTM) Chart

F Revenue (TTM) data by YCharts

If interest rates climb and lending standards tighten, automakers may be forced to boost profit-busting incentives or take on more risk in their own lending operations. It's possible we're already seeing that happen.

According to Ward's Auto, the daily sales rate of U.S. light vehicles slipped 1.4% year over year in the first two months of 2017. The rate at Ford fell 2.6% from last year, while the rate at General Motors inched up just 0.3%. A double-digit percentage drop in car sales is being offset by strong light-truck sales right now, but there's no guarantee that will continue. 

It's also potentially concerning that market share for captive financing companies has increased to 28.4% from 27.8% year over year, and that Kelly Blue Book estimates that incentives into the end of last year were 20% to 25% higher than normal. 

What's ahead

The Federal Reserve has indicated that rates could increase by an additional 0.50% this year, and if they do, then average monthly payments for borrowers will likely head higher.

With consumers already saddled with more than $1 trillion in auto debt, and a less favorable lending environment in the works, it could become tougher sledding for companies that rely heavily on auto sales. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.