CarMax finance arm grows pre-qualification feature

CarMax Auto Finance plans to scale its "no-impact-to-your-credit-score" pre-qualification feature — first tested in March — across the U.S. during the rest of the year, Jon Daniels, senior vice president, said on CarMax's earnings call last month. The feature is currently available to about 25 percent of its online customers.

"As interest rates rise, consumers' ability to confidently secure financing is more important than ever," said Bill Nash, CEO of CarMax. "The expansion of our best-in-class pre-qualification product, once fully deployed, will provide frictionless and seamless access to multilimit credit terms on every car within our retail inventory."

The move is in line with CarMax's push to improve consumers' omnichannel buying and financing experiences as the used-vehicle retailer looks to tap into changing customer preferences, Nash said.

"While we expect our online and omni sales to grow over time, our goal is to provide the best experience, whether that's in-store, online or a seamless combination of the two," he said. "Our ability to deliver integration across digital and physical transactions gives us access to the largest total addressable market."

Daniels said customers used CarMax Auto Finance for financing on 39.3 percent of loans in the retailer's first quarter, which ended May 31, compared with 43.7 percent in the same period last year, attributing this to CarMax taking the initiative on its interest rates.

"As the Fed clearly signaled interest rate hikes at the beginning of the calendar year, CAF was able to quickly test and methodically adjust consumer rates to carefully manage sales, finance margin penetration," Daniels said.

He said CarMax Auto Finance has been carefully watching credit unions and external banks as interest rates rose.

"If you looked at the average APR we charged our customers last quarter, it was 8.2 percent; this quarter it's 9 percent largely coming from us passing along our increased costs onto the consumer," Daniels said.

"It's always a delicate balance. We watched our competition, we observed them raise rates throughout the quarter; we were just a little sooner and therefore our penetration came back within the quarter."

Accounting for consumers' tentativeness toward purchasing vehicles has been difficult, Nash said.

"I think overall, the consumers are absolutely a little softer. You think about vehicle affordability, the general inflationary pressures, rising interest rates," he said. "If you think about those, it's hard to quantify the impact of each one. There's still some demand out there, and I think that's what we're really trying to maximize on."

Nash said CarMax Auto Finance has also been impacted by inflation.

"If you look back a year ago, 70 percent of our inventory was under $25,000. Fast-forward to today, it's more like 43 to 45 percent," he said. "That's a result of inflationary pressures, which is one of the reasons why we're focused on getting more affordable inventory out there."