Lenders warn buyers as used car prices drop
While the low prices may look attractive to people hoping to buy a used car, investors are sounding the alarm for fear that the country’s struggling economy could ultimately lead to more foreclosures.
“There’s been a real margin squeeze on new car production, on the one hand, and on the other hand there’s been a drop in used car prices,” said Tim Spence, chief executive. by Fifth Third. told Bloomberg in an interview on Friday. “That made us slow down loan production a bit.”
This is a problem that lenders seek to anticipate, as was the case when used car prices have skyrocketed at the start of the pandemic.
Now, instead of high overhead, rising interest rates are causing high monthly payments, which are simultaneously skyrocketing.
“The average car loan payment is now $738 per month,” Chris Gardner, CEO of Vamos Auto in Dallas Fort Worth, told NewsNation.
Vamos Auto is an integrated finance company specializing in the subprime car market, making it not only a dealer but also a lender.
“When the Fed raises rates to 75 basis points, which seems to be monthly, they’re going to raise those auto loan rates at a faster rate than the decline in car prices,” Gardner said.
Gardner says the problem is that if consumers end up owing more than their car is worth, some might stop paying altogether.
“While these loans are in default and these lenders are taking [the cars] back, they get less when they go and sell that car,” Gardner said.
According to Bloomberg, Wells Fargo & Co. reported higher loss rates for loans it issued late last year, which contributed to higher write-offs for the period. Similarly, Bloomberg reports that Ally Financial Inc.the nation’s second-largest auto lender, saw four times more write-offs for retail auto loans in the third quarter and that Fifth Third Bancorp is withdrawing its loans.
However, Ally CEO Jeffrey Brown maintains there will be no changes to his company’s creatives, citing the net write-off rate, which has remained below pre-pandemic levels.
“We’re still very happy with the new loans we’re creating today,” Brown told Bloomberg. “We are constantly cutting margins where we see additional pockets of risk. The analytics behind that are very robust – we have weekly credit conversations and buy box adjustments – so it’s a very fluid environment.
This comes despite Fifth Third reporting that more and more consumers with adverse credit scores have been negotiating to the bone with lenders to keep their vehicles.
“People, if they have a job, they want to keep their car, they don’t want to buy a new one,” credit manager Richard Stein said, speaking about used car buyers at the start of the pandemic at Bloomberg.
“They do a lot of things to keep their car up to date or work with lenders.”