The Federal Reserve recently signaled a pause in raising interest rates, citing concerns about a slowing global economy and sluggish consumer spending. However, these two economic factors have been countered by strength in labor numbers and strong consumer spending in the first quarter. When asked, economic prognosticators and financial pundits say the economy reflects the lens through which it is viewed.
From a lender’s perspective in the automotive space, there are some unique mitigating factors. New vehicle prices continue to rise, pricing some consumers out of the market. Even with relatively low interest rates available for prime buyers, loan terms extended to upwards of 84 months leave consumers uncharacteristically exposed.
For those consumers who pivot away from a new vehicle toward a low mileage used vehicle, the picture is not much better. Low inventory and steadily rising used car prices put prime buyers in competition with traditional sub-prime buyers. Even used car auctions have seen a rise in general consumers willing to take a risk on untested vehicles.
These micro-economic issues do not reflect the macro-economic concerns of tariffs, lengthening loan terms and default exposure. A record 7 million Americans are 90 days or more behind on their auto loan payments, as reported by the Federal Reserve Bank of New York in February. This number is higher than during the wake of the financial crisis. Some economists warn that this is a red flag.
Given these factors, what levers are available for an auto lender trying to increase an auto loan portfolio? Continue reading