Amitay Kalmar, CEO and co-founder of Lendbuzz, has seen the financial industry ebb and flow since the Great Recession of 2008 to pandemic recovery in 2021.
Though he’d thought he’d seen it all, he says the last two years have impacted the financial services and automotive industries in unique and unexpected ways. He expects those impacts to change the lending landscape for some time to come.
He lists the top three impacts as:
1. Low Inventories/Increased Demand. Prices went up because of the limited availability of new and used vehicles. According to Kelley Blue Book, the average price of a new vehicle is $48,301. And the average cost of a one- to five-year-old car in July was $34,289, in an iSeeCar’s analysis of over 1.8 million used car sales.
“None of this is new. It has been going on for the last 12-18 months,” Kalmar stresses. “But it has changed the landscape and dynamics of how consumers and dealerships sell cars, sales and delivery cycles, negotiation dynamics, and the prices consumers pay.”
2. Rate Increases. Rates were unnaturally low for nearly 14 years. Now they are creeping back up to 2001-2005 levels. “This has impacted consumers over the last four to six months,” he says. “But higher vehicle prices have more impact than rate increases on monthly payments.”
He explains consumers who purchased vehicles three years ago paid an average of a $400-$500 car payment. Now they pay $600-$700 a month for an equivalent vehicle. “We are talking about a 30% to 50% increase in monthly payments, and that is mostly due to increased vehicle prices.”
In contrast, increased rates tack $5 to $20 onto the monthly payments, he says. “The rest is because of higher vehicle prices.”
Consumers adapted by putting more money down on the vehicles they purchase. This aligns their monthly payments with what they hope to pay and helps them meet debt-to-income and payment-to-income ratios.
Car buyers also are more price sensitive at the time of purchase, he adds. “This will eventually impact vehicle pricing and move the industry into a more normalized pricing environment,” he says.
“Sometimes lenders will extend terms to get consumers into a vehicle within a payment threshold,” he says. “But when you extend the term, you get higher overall finance charges.”
3. Reliance on Alternative Data. Lenders have adapted their underwriting algorithms to get consumers without credit scores into a vehicle. Bank account information is a key source of alternative data. “Individuals link their bank account to a lender’s platform. The lender pulls their transaction history to evaluate cash flow and develop a risk score,” he says. “This gives a good idea of the consumer’s income and expenses over time.”
Lenders are seeing inflation impact bank accounts. “When you analyze bank accounts and look at Quarter 1 or Quarter 2 of 2022, we see a year-over-year increase in an individual’s income of about 6% to 10%, year over year” he says. “We are also seeing a 10% increase in expenses. Some people are spending more money as the pandemic ends. Still, expenses are outpacing income growth. Income is flattening and expenses are rising.”
This scenario will reduce disposable income. “Consumers will become more cautious with their spending and more sensitive when they shop for a car or other large purchase,” he says. “That will impact demand. The Federal Reserve wants to see demand decline. It is one way to control or manage inflation.”
Kalmar believes the country has hit peak inflation. “We have reached the inflection point where prices are not increasing at the same rate,” he says. “Wages are not increasing as fast as they were. As a result, inflation will continue to decrease, because consumers will have less cash to spend. At least that is the hope.”
WHERE RATES ARE GOING
According to a recent Edmunds study, the average annual percentage rate on new vehicles is 5.7%, the highest average rate since 2019, made worse when the average amount financed has hit an all-time record of $41,347.
Kalmar predicts auto rates will eventually catch up to Federal rates. He explains, “Most financial institutions, whether or not they are depository institutions, will see their cost of funds increase and will want to manage their profit margins,” he says. “They will need to increase their rates.”
He thinks auto loan rates will increase 4%. “But the impact on monthly auto loan payments with 2%, 3%, 4% increases is not as significant as a mortgage loan,” he says. “Further, if we see a decrease in pricing, which we’ve already started to see with used cars over the last three months, the impact on loans will be less than we think. Pricing will decrease as rates increase, and they will sort of mitigate each other. And at the end of the day, the consumer’s payment will be where it is today or even lower.”
ROADBLOCKS AND OPPORTUNITIES FOR CONSUMERS
“The roadblocks are clearer than the opportunities for consumers,” says Kalmar.
The roadblocks include:
- Limited inventory on dealer lots
- Record vehicle prices
“The main opportunity is high used car values,” he says. “Consumers will pay more for a new vehicle but will get more for their old vehicle. But if they are not trading in a vehicle, it’s a far more challenging environment to purchase one because of higher vehicle prices.”
LENDERS & DEALERS CAN HELP
Lenders are already helping consumers by not raising interest rates as fast as they could.
“They have not passed on the full Fed rate increase to consumers for auto loans,” Kalmar says. “It depends on the philosophy of each lender. Some manage for longterm growth while others look for shortterm margins. We’ve seen some lenders raise rates more than others.”
On the dealership side of the coin, Kalmar says it’s smart to expand the vendor market. “I encourage dealers to add more lenders and have more options in their toolkit so that they can serve more customers,” he says. “When credit environments become more challenging, the breadth of the lender network as a dealership becomes more important.”