Auto lenders brace for interest rates and recession
As the Federal Reserve raises interest rates to fight inflation, all kinds of debt become more expensive. Much of the daily attention can be focused on credit cards and mortgages.
But amid headlines noting that home buyers are being shut out of their markets, those savings may be tested by the fact that it has become harder to put food on the table as prices rise. soaring into double digits – auto loans will also feel a pinch.
The big banks are ready to report their earnings, and with these reports, we’ll get an idea of how their auto lending operations fared over the past quarter. We are already seeing some impact from inflation and the vagaries of the macro economy, where, for example, JP Morgan Chase reported that auto loans and leases were $8.4 billion in the first quarter, compared to $11.2 billion a year ago. period.
Elsewhere, platforms like CarMax reported in their most recent results that their net lending in the most recent period was $2.44 billion, down slightly from the $2.48 billion seen. one year ago.
The fact remains, as Kelley Blue Book reported, auto loans are getting a little harder to get, at least as measured in May and compared to April.
This muted activity contrasts sharply with data from the Federal Reserve which showed, in the first quarter, that auto loans, which now stand at around $1.4 trillion, rose by $11 billion.
The scatter of data points shows that there could be a natural pullback in demand for loans, and underwriting in this environment will likely become a little tighter. But some trends seem inexorable.
Demand for large bills declines
Indeed, the demand for big ticket items is taking a break no matter where you look. High-end retailer RH told investors Thursday (June 30) that it expects consumer demand to continue to weaken through the end of the year. Mortgage rates, which have doubled in recent months, are impacting demand for household goods – and consumers are pulling back.
Read more: RH says high mortgage rates are killing demand for luxury homes and furniture
As for what’s happening with the loans that are on the books, Ford chief financial officer John Lawler told the Deutsche Bank 2022 Global Automotive Conference earlier this month that delinquencies were on the rise, although they are not yet a cause for concern.
Regardless of the macroeconomic headwinds that are in place now and will be in place for some time, we are seeing a push for platforms to gain traction in auto finance, with some innovations in the mix in an effort to make lending a bit more affordable. In one example, Boston FinTech Paydownhero, which helps customers pay off auto debt, rolled out a new debit card with 3% cash back.
See more : FinTech Vehicle Debt Paydownhero Launches Gas Rewards Debit Card
Carvana, in another example, offers what it called personalized real-time financing, and it securitizes these loans while selling them to third parties. For companies like CarMax, auto finance revenue is significant, at $204 million in the last quarter, so a downturn would certainly impact that operation.
But the connected economy requires a continuum of services — from finding cars to financing them to delivering them — that will long survive Fed tightening cycles.