Record used-vehicle values are pushing down loan-to-value ratios (LTV), prompting lenders to increase their acceptance rates and lower interest rates on refinance loans.
The average retail loan-to-value ratio across auto refinance applications in May clocked in at 102%, the lowest on record, according to data provided to Auto Finance News by auto refinancing fintech RateGenius. LTV ratios are edging lower, due primarily to record high used-vehicle values. In January 2021, average application LTV sat at 120%, and in January 2020, the ratio was 128%.
Overall acceptance rates for refi auto loans also came in at a record 32.9% in May, sourced from borrowers with average LTVs of 88%. By comparison, acceptance rates in May 2020 hovered between 20% and 23%.
The low-interest environment is also prompting lenders to reduce their rates, RateGenius Chief Executive Christopher Speltz told AFN. “Rates are still extremely low. [Consumers] can still get a 48- or 60-month auto refi between 2.75% and 2.99% with good credit,” he said. The fintech works with more than 150 auto lenders, including credit unions, independent financiers and banks.
In fact, five or six of the company’s lending partners just lowered their rates this morning, Speltz said, noting that lenders update their rates around the first of the month. One, for example, lowered its rates by 20 basis points, while another decreased its rates by 75 to 100 bps across all credit tiers. A third moved its rates down 50 basis points, primarily in the prime credit tier, and another decreased rates 75 bps to 125 bps for model years ranging from 2016 to 2021.
Yet, as LTV ratios are directly tied with vehicle values, it is unclear how long this trend will last once used vehicles resume normal depreciation and new-vehicle production is not hampered by the global semiconductor chip shortage, Speltz said. Lower rates, however, will likely have more longevity. “I don’t see rates changing, frankly.” The Federal Reserve previously signaled that it would not raise its benchmark interest
Auto refinance volume surged during the pandemic as more consumers engaged in digital car buying and financing and became more aware of the credit product. Auto refinance fintech Gravity Lending experienced triple-digit month-over-month growth during the pandemic, and MotoRefi secured $45 million in Series B funding early last month, led by Goldman Sachs. Speltz estimates that auto refinance is currently a $50 billion market.