When you combine the effects of the Covid-19 pandemic and record high transaction prices with a sinking economy and lower inventories, adding tightening credit to the storm is escalating mere headwinds slowing a rebound in auto sales into a hurricane.
Demand for auto loans has been on a steady decline since the first quarter, when the Covid-19 pandemic first took hold in the U.S. and now it’s getting more difficult for consumers who are seeking an auto loan to land one.
“In May, 35% dealers said more customers were unable to obtain financing. Dealers are indicating credit is starting to tighten,” said George Augustaitis, Director of Automotive Industry and Economic Analysis at auto shopping and research site CarGurus.com in a video blog post. “If the banks are indicating they’re tightening standards and dealers are experiencing it on the front lines, it’s showing that one of the biggest headwinds in this industry is going to be credit availability.
Don’t blame lenders’ skittishness entirely on Covid-19, said David Snitkof, Vice President, Analytics at New York-based data analysis firm Ocrolus. He points out that delinquency rates for auto loans, measured by 90-day delinquencies, “are up to recession-era levels. That’s not all because of Covid. That was actually a trend happening already for the last several years, probably driven by expansion of credit, particularly by subprime auto lending and the availability of capital to sub prime auto lenders from the capital markets.”
In other words, extending credit to customers with lower credit scores and higher risk. Having been burned by so many delinquencies, lenders have been progressively raising their standards since the first of the year, according to Snitkof. He cites the percentage of lenders tightening their criteria has increased from about 9% in the first quarter to 55% in the third.
Adding to that headache for lenders is simply how the world has changed during the pandemic. Let’s start with the fact that so many people have lost their traditional steady paychecks, in many cases, turning to freelance or “gig” work.
“The traditional methods of evaluating credit are now insufficient. You can’t rely on a credit bureau for your information” said Snitkof. “You have to go deeper into data sources and go deeper into those data, using more borrower- specific details—the type of job, industry, data from a longer time period. All the other impacts that the shock of the Covid pandemic can have on their ability and willingness to pay.”
Further skewing the data lenders rely on, said Snitkof is the fact that “some people are making more money from unemployment than their jobs, but that won’t last forever—another reason people are tightening up.”
The likely result is further frustration for those who simply can’t swing a vehicle purchase without sufficient and affordable financing as they face rejection from lenders. Indeed, CarGurus’s George Augustaitis surmises those who qualified for tier one financing a year ago with a credit score around 600-610 “are unlikely to do so today,” leaving them with the choice of accepting loans requiring larger down payments or with higher interest rates.
The choice they’re making in greater numbers, however, is to ride out this hurricane…in their current car.