DALLAS — Rising interest rates will push more independent auto finance companies to close up shop following years of lending to deep-subprime consumers, said Michael Vogan, assistant director and lead auto economist for Moody’s Analytics.
“A lot of [independent auto finance companies] are funded by private equity, and they were funded by the cheap capital in the market when interest rates were low,” Vogan said during a presentation at the Auto Finance Performance and Compliance Summit. “But now the day of reckoning has come, to some degree. The interest rate rise is going to affect them a lot, both in terms of their consumers — because given their precarious financial situation they are much more sensitive to monthly payment increases — and then also their capital is going to start dropping and their profit margins are going to get thinner as interest rates go up.”
Though non-bank lenders started to pull back in 2016, 90-day delinquency rates have climbed above the peaks of the great recession. While Vogan doesn’t believe a doomsday bubble is on the horizon, the delinquency rate is concerning given the strength of the economy, he said.
“A 500 credit score in bad times could be someone who got unlucky, lost their job, and is going through a rough patch,” he said. “Someone with a 500 credit score during a good economy — that’s a signal that something is wrong.”
While subprime credit degradation is occurring across the board, Moody’s found that bank customers performed better than non-bank customers with comparable credit scores. “[The difference is] banks have a lot more regulatory scrutiny than these auto finance lenders,” Vogan said. “When [banks] originate, they are much more likely to dot their i’s and cross their t’s.”
