Interest rates top auto lenders’ concerns for 2024

Interest rates will largely dictate how financial institutions manage risk and maintain origination volume in 2024. Elevated interest rates caused banks and credit unions to slow auto lending this year, but some economists expect rates to remain stable in 2024 and potentially decrease in the second half of the year, which could open the door for lenders to increase originations. Auto lenders can grow originations if rates remain stable, but origination growth could lead to liquidity troubles, Alex Liegl , chief executive at Tenet , told Auto Finance News . “Interest rates are one of the most important [factors in 2024],” he said. Rates “are stabilizing now, and tightening liquidity might resurface over the coming year. Banks, credit unions and financial markets are going to start lending more after they've tightened up over the last year, now that things have stabilized and there's more predictability with interest rates.” The Fed ’s benchmark interest rate has risen to a range of 5.25% to 5.5% following six quarters of increases, bringing volatility and unpredictability to the market. The average interest rate reached 8.3% in August on a new-vehicle, 48-month term auto loan and 7.9% for a new-vehicle, 60-month term, according to the Board of Governors of the Federal Reserve System . Market stabilization allows for greater predictability for financial institutions to assess how interest rates influence asset base, yield expectations and portfolio performance, Liegl said. Affordability impact Subprime lender Consumer Portfolio Services , for one, is paying close attention to any market aspect that affects consumer affordability, Mike Lavin , president, chief operating officer and chief legal officer, told AFN . “That includes interest rates, inflation, the cost of used cars and the appropriate APR to charge,” Lavin said. “Those are macroeconomic trends, and based on what happens there, we can then decide whether to pull back more, to stay the same or grow . We are scaled right now to grow quickly. We're just waiting for the [right] time.” To evaluate how the market will trend in the next year, Lavin said CPS also examines the potential for recession as well as the unemployment rate and the opportunity to complete an auto asset-backed securities deal. “So far, it looks like in 2024, all three of those things are going to work out in our favor, so I think things look pretty good,” he said. Lavin remains bullish on the subprime market since it appears the United States economy has avoided a recession and CPS is receiving as many applications this year as it did in 2022, when the company had a record number of applications, he said. Zero-interest rates no more Vroom and Vroom Financial Services , too, are keeping an eye on interest rates and are trying to position themselves to react swiftly to macroeconomic changes, Chief Executive Tom Shortt told AFN . “We believe that rates are back to normal. … If you go back past millennials, a 3% to 6% interest rate is normal, not zero [percent], so we believe the zero-interest rate is behind us,” Shortt said. “There may be some softening next year, but there are macro-inflationary pressures out there, as well as the supply of new [vehicles] coming back online. We're trying to position ourselves to be able to react to what happens.” Homing in on credit performance Meanwhile, Santander Consumer USA is also looking at any market conditions that affect consumer credit performance, Betty Jotanovic , president of Chrysler Capital and auto relationships, told AFN . “ We’re closely watching vehicle inventory, EV adoption, interest rates, Fed movement, inflation and the impact of the UAW strike on vehicle affordability and how these market conditions may affect consumer delinquencies,” she said. Increased incentives may also be on the horizon as new-vehicle supply replenishes from pandemic lows, Jotanovic said. “We may see some normalization of supply and demand challenges and, to the extent that vehicle supply continues to remain elevated, we may see more subvention in the market,” she said. “If vehicle inventory levels continue to be elevated, we’ll likely continue to see a push for incentives and electrification fueled by government subsidies.” Interest rates were top of mind in 2023 and that is expected to continue for lenders in 2024, Tom O’Neill , risk consultant at Equifax , said on the company’s Dec. 7 Market Pulse webinar. “Interest rates, impacted margins, cost of funds, liquidity … and all of these things that impact consumers directly,” he said. “Even as we've been wrestling with this and living and breathing this for the past year and a half, it's safe to say that the interest rate environment is going to continue to be a primary influence as we head into 2024.”

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