Ally Overtakes Wells Fargo as Top U.S. Auto Lender

Ally Financial Inc (NYSE:ALLY) became the largest U.S. retail auto lender in the third quarter, displacing Wells Fargo & Co (NYSE:WFC) for the first time since the start of 2013, according to a report from Experian Automotive on Monday.

Much of Ally's growth came from financing used car sales, an area where the former in-house finance arm of General Motors Co (NYSE:GM) has been aggressively expanding. The lender extended a record amount of used car loans in the third quarter.

In recent years, banks expanded in the used car market as carmakers' in-house finance arms came to dominate the new car market. In the third quarter, 54.1 percent of used car purchases were financed with a loan, a record high.

Banks and other lenders have also been willing to finance larger amounts for used car purchases. The average size of a used car loan in the third quarter was up nearly 4 percent from a year earlier to $18,576, an all-time high, even as used car prices fell in the quarter, according to the Manheim Used Vehicle Value Index.

Focusing on consumers buying used cars is riskier for banks because these borrowers tend to have lower credit scores and are more likely to default. The average credit score for a borrower buying a used car in the quarter was 650, compared with 713 for those buying a new car. Credit scores can range from 300 to 850, and scores below 600 are considered subprime by Experian Automotive.

Banks are accepting lower compensation for the increased credit risk. Interest rates for used car loans across the industry fell 0.09 percentage points to 8.54 percent, while rates for new car loans rose 0.20 percentage points to 4.47 percent in the third quarter.

As a group, banks extended 2.1 percent more auto loans to subprime borrowers in the quarter, the most of any type of lender.

Ally, along with Capital One Financial Corp (NYSE:COF), Santander Consumer USA Holdings Inc (NYSE:SC), GM Financial and other lenders are the targets of investigations into subprime auto lending practices.

(Editing by Jeffrey Benkoe)