Time magazine weighed in on the auto finance industry this weekend with a piece looking at the low rates currently being offered to prime borrowers. Are these low rates due to an increasingly crowded market going after a slow-growing customer base?
Time cites data from WalletHub.com that puts average rates at 4%. This compares with 7% five years ago and 11.6% in 1990.
There are a few reasons for these low rates. First off, as the article points out, while the economy is still not great for banks looking to make money in mortgages and credit cards, autos are in a relatively good spot. This means that banks are looking to be competitive with captive lenders, something they hadn’t tried in the past.
In addition to the dour outlook for mortgages and cards, auto sales are projected to be north of 16 million next year, near pre-credit crisis levels. This has also caused more lenders to focus on auto.
But might the auto finance space have reached capacity as far as the number of lenders? With so many players trying to take advantage of the growth, there isn’t enough growth to go around. The result: Rates are being pressured so far that, while great for consumers, lenders face very thin profit margins.
As such, an increasing number of lenders are moving down the credit spectrum to subprime and deep-subprime space, where risk is higher but APRs are less compressed.
How long before the subprime space reaches capacity?