As lenders tighten credit access to mitigate risk from the coronavirus pandemic, dealerships face more difficulty getting customers approved for auto loans.
A survey by the Federal Reserve issued to "select large banks" signals that more stringent lending practices have been adopted for consumer loans, including auto loans. Sixteen percent of lenders who responded noted that lending standards for auto loans tightened somewhat over the past three months.
Jonathan Smoke, chief economist at Cox Automotive, said there's early evidence of tighter credit standards at certain lending companies. Aside from aggressive incentive activity from automaker captives, which is beginning to wane, large non-captive lenders are starting to pull out of automotive originations.
"There's more conservatism on the part of the lenders. That's why we haven't really seen subprime or used-car [finance] rates come down, even though the [Federal Reserve] cut rates to zero," Smoke said.
Tighter credit standards could push more consumers out of the new-vehicle market, creating a drag on the industry and slowing economic growth.
Credit tightened greatly following the housing market crash in 2008, choking loan access as lenders shifted cash in anticipation of higher loan losses. Restrictions on lending limited auto industry profits, and automakers piled on new vehicle incentives to generate interest and dealerships suffered from lost sales.
Consumer spending accounts for roughly 70 percent of U.S. gross domestic product, according to the Federal Reserve Bank of St. Louis.
The majority of new vehicles sold in the U.S. are financed. Experian noted that about 85 percent of new vehicles sold in the fourth quarter of 2019 were obtained through either a loan or a lease. About 55 percent of used vehicles sold in the fourth quarter were financed.
George Augustaitis, director of automotive and economic analytics at CarGurus, said F&I managers are aware of the risk tolerance and other finance requirements at various lenders when it comes to certain auto deals and can structure those deals according to what is most likely to be approved. Managers will have to lean on these skills more heavily during this time, as consumers face record-high levels of job losses or job reductions.
"If you tell someone, 'I can get you approved on a deal, but it's gonna take $2,000 down.' I feel like that level of transparency, given the current situation, people are going to appreciate," Augustaitis said.