Auto Lenders Brace For Higher Interest Rates, Recession

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As the Federal Reserve boosts interest rates to beat inflation, all sorts of debt becomes more expensive. Much of the everyday focus may be on credit cards and mortgages.

But amid the headlines noting that homebuyers are being priced out of their markets, that savings may be tested by the fact that putting food on the table has become harder as prices soar by double-digit percentage points — auto lending will feel a pinch too.

The big banks are on tap to report earnings, and with those reports we’ll get a sense of how their auto lending operations fared in the most recent quarter. We’re already seeing some impact from inflation and the vagaries of the macro-economy, where, for instance, J.P. Morgan Chase reported that auto loan and lease originations were $8.4 billion in the first quarter, compared to $11.2 billion in the year-ago period.

Elsewhere, platforms like CarMax reported in its most recent results that its net loans originated in the most recent period stood at $2.44 billion, a slight decline from the $2.48 billion seen a year ago.

The fact remains, as Kelley Blue Book reported, that car loans are getting a bit harder to come by, at least as measured in May and compared to April.

That muted activity stands in stark contrast to Federal Reserve data that showed, in the first quarter, that auto loans, which now stand at about $1.4 trillion, increased by $11 billion.

The smattering of data points shows that there may be a natural pullback in loan demand, and underwriting in this environment will likely become a bit stricter. But some trends seem inexorable.

Big Ticket Demand Wanes

Indeed, demand for big-ticket items is taking a breather no matter where you look. High-end retailer RH told investors Thursday (June 30) it expects consumer demand will continue to weaken through the end of the year. Mortgage rates, having doubled in recent months, are impacting demand for home goods — and consumers are pulling back.

Read more: RH Says High Mortgage Rates Killing Demand for Luxury Homes, Furniture

As to what happens with the loans that are out there on the books, Ford Chief Financial Officer John Lawler told the Deutsche Bank 2022 Global Automotive Conference earlier this month that delinquencies are on the rise, although they are not yet a cause for concern.

Regardless of the macro headwinds that are in place now, and will be in place for a while, we’re seeing a push from platforms to gain ground in auto financing, with some innovations in the mix in a bid to make the loans a bit more affordable. In one example, Boston FinTech Paydownhero, which lets customers pay off auto debt, has rolled out a new debit card with 3% cash back gas rewards.

See more: Vehicle Debt FinTech Paydownhero Debuts Gas Rewards Debit Card

Carvana, in another example, offers what it has termed personalized, real-time financing, and it securitizes those loans while selling them to third parties. For companies like CarMax, auto financing income is significant, at $204 million in the most recent quarter, so a downturn would certainly be impactful to this operation.

But the connected economy demands a continuum of services — from browsing for cars to financing them to having them delivered — which will long survive Fed tightening cycles.



About: More than half of utilities and consumer finance companies have the capability to process all monthly bill payments digitally. The kicker? Just 12% of them do. The Digital Payments Edge, a PYMNTS and ACI Worldwide collaboration, surveyed 207 billing and collections professionals at these companies to learn why going totally digital remains elusive.