Credit concerns are the new normal for franchised dealers in 2018, according to the latest Cox Automotive Dealer Sentiment Index.
Federal interest rate hikes, tightening lending standards and rising vehicle prices have franchised dealers surveyed for the third-quarter index feeling the pinch as credit availability for consumers crept up slightly on a list of factors holding business back. It was No. 6 in the latest report, issued Monday, with 23 percent of franchised dealers citing it as a factor.
A year ago, it was in the No. 7 spot, with 18 percent of franchised dealers citing difficulty obtaining credit for their customers. In the second-quarter index, credit availability for consumers was No. 3 on the list, with 24 percent of franchised dealers citing the worry. For all three time periods, marketplace conditions and competition from other dealers were the No. 1 and No. 2 factors.
Independent dealers have been first to feel the effects of credit tightening in recent years because they serve a larger subprime base, according to Cox Chief Economist Jonathan Smoke. But the uptick in franchised dealers citing credit complaints vs. a year ago indicates that they also are feeling the pain. This quarter has been the first in eight straight quarters that the Federal Reserve has not reported tightening credit standards, he said.
While tightening credit standards could be reducing the rate of negative equity loans, that reduction is not necessarily a healthy signal for the new-vehicle market, Smoke said.
Data from deals conducted using Cox Automotive's Dealertrack F&I software shows that 17.3 percent of funded new-vehicle loans year to date had negative equity in them. While slightly higher than the 16.7 percent recorded from January through August 2017, the number is down from 20 percent of deals for that period in 2016. But instead of a healthy shift in direction, the numbers reveal fewer shoppers in the new-vehicle market.
"Now with credit tighter, it essentially produces the scenario that a lower-credit borrower is not getting those payments," Smoke said. "Either they're not purchasing at all, or they're electing to go to the used vehicle market to get the payment they need."
The Cox Automotive Dealer Sentiment Index gauges dealers' perceptions of the past 90 days and expectations for the next three months. It identifies key factors affecting retailers' optimism or pessimism. The latest survey, conducted July 31 to Aug. 13, had 1,276 franchised and independent dealer respondents. Responses were weighted by dealership type and sales volume to represent the national dealer population.