As states begin to reopen and CarGurus leads trend upward again, it seems we might be through the trough. These signs indicate that the US might soon emerge from the worst of the COVID-19 pandemic. However, we must be cautiously optimistic because it’s unlikely that the unemployment rate has reached its peak or that we are fully in recovery mode. And for the auto industry, there is an additional headwind on the horizon: credit availability.
While demand for vehicles is growing—US lead volume on CarGurus has nearly returned to the same level as February—the sales bounce back in the auto market may be tempered by the availability of credit.
Availability of credit may be the most important factor in the new vehicle market and one of the most important factors in the used vehicle market. According to Experian’s recent State of the Automotive Finance Market, 85% of new vehicles and 55% of used vehicles were financed. If consumers can’t get credit, they won’t be able to finance or lease a vehicle.
Banks tightening current lending practices
Every quarter, the Federal Reserve conducts the Senior Loan Officer Opinion Survey, a survey of senior loan officers on bank lending practices. The most recent survey was sent to respondents on March 23 and responses were due back by April 3, right as COVID-19 was beginning to wreak havoc on the economy.
The results indicate that lenders are likely more fearful of the near-term economic outlook than they were the previous quarter. According to the survey, banks are tightening their lending practices and implementing stricter requirements for approval across all three categories: credit card, auto, and other consumer loans. While the stricter lending requirements are being created at the quickest rate since the 2008 recession, we are still far from the levels of the 2008 recession.
According to the CarGurus COVID-19 Sentiment Study, 39% of car shoppers say their finances have been negatively impacted by the crisis. This could mean significant headwinds for the auto industry when it is combined with credit standards tightening. This comes just as states are lifting stay-at-home orders and consumers are beginning to come back to the market. Despite new vehicle loans and incentives being at record levels and used vehicle prices declining, many consumers will not be able to take advantage of these deals if they can’t get financing.
According to a CarGurus Guru Board survey in April, 31.9% of dealers indicated more or significantly more consumers were unable to obtain financing to make a purchase. In May, that number increased to 45.5%.
Driving sales despite limited credit availability
As consumers come off the sidelines and resume their shopping process, they may find it more difficult to get credit than it was in January 2020. For dealers, there are several steps you can take to encourage a sale:
- Do a credit check earlier in the process. By checking the consumer’s credit sooner, you’ll know which vehicles consumers are likely to get approved for and which they will not. Vehicles that book out higher with the bank than you own it for might be more likely to get approvals from captives.
- Shift lender usage. While there might be a bank that you use most often for financing, you will likely need to start using more subprime financing as tier-one captives stop buying the same deals they purchased a year ago.
- Encourage consumers to use their existing bank or credit union. If you’ve exhausted all your lending partners, recommend that the consumer ask the bank that they currently have a relationship with for a loan. While you might not get the additional profit from financing, a vehicle sold is better than no vehicle sold.
While more normal economic activity is starting to resume, the recovery path will be bumpy as consumers navigate what is certain to be a new normal. Sales will rebound, but credit availability might slow the near-term momentum and growth rate that usually comes with the busier summer months.