Capital One's Auto Loan Trends Are Quietly Improving. Why It Matters for the Stock.

Capital One (NYSE: COF) is changing its business model in a significant way following its acquisition of Discover. The key shift is that it will now issue credit cards and process credit card transactions, which generates reliable fee income. Other than that, the company's core focus on lending to lower-credit-quality customers remains in place. But as this big business shift is underway, Capital One's auto lending trends are surprisingly positive news.

Capital One: High risk and high reward

Lower-credit-quality customers are willing to pay higher interest rates for access to debt. That is true with both credit cards, which are effectively revolving credit facilities, and with car loans, which are longer-term asset-backed loans. Auto loans have a history of being particularly risky during recessions, when customers' finances are stretched.

Since a large chunk of money is already out the door, the only option to recoup losses is to repossess the car. That is not an easy or pleasant experience for anyone involved, since the repossessed car will need to be resold to extract any value it may have. Credit card balances generally aren't as large as those for a car loan, so individually they don't pose the same risk.

Watching Capital One's car loans

Essentially, Capital One's car loans can serve as an important leading indicator of credit risk. This is why the business, while smaller than its credit card operation, is worth watching very closely. Right now, the risk doesn't seem all that high, even though consumers are tightening their budgets amid rising inflation. And the fact that high oil prices have some on Wall Street worried about a global recession.

In the first quarter of 2026, auto charge-offs fell 18 basis points from the fourth quarter of 2025. While they were up nine basis points year over year, they were still a fairly reasonable 1.64%. In April, the figure was even better at 1.2%. So even when there is a problem with an auto loan, the company is managing to recoup much of its loss. Non-performing auto loans, meanwhile, amounted to just 0.55% of its loan book, down from the fourth quarter and the year-ago period. That figure held steady in April.

All in, Capital One's auto loan portfolio isn't screaming that the bank's credit risks are rising. That's a positive sign for investors, but one that you should continue to monitor. When the economy turns south, which it will eventually do at some point, the bank's auto loans could be where the impact starts to hit first. A good indicator of that risk would likely show up first in the 30-day delinquency rates, but those were down sequentially and year over year for auto loans in the first quarter, as well, with an even further decline in the Month of April.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Capital One Financial. The Motley Fool has a disclosure policy.