Competition in the credit market is heating up as banks and credit unions lean on low-cost deposits to keep auto interest rates low even as the Federal Reserve raises the benchmark interest rate.
Banks and credit unions have been offering competitive interest rates in a credit market marked by rising interest rates as the Federal Reserve looks to tame decades-high inflation, Bo Mandal, president and chief executive of Mandal Automotive, told Auto Finance News. D’Iberville, Mississippi-based Mandal Automotive operates three Buick, GMC, Chrysler, Jeep, Ram and BMW dealerships.
“From a competitive standpoint, I believe that the banks still have the appetite to want to compete with [other lenders] out there,” Mandal said. “Banks get to borrow money at a lower rate … and let’s face it, most of these banks are sitting on more capital than they’ve ever sat on before and they’re trying to loan money. That’s the climate we’re in today.
“Even though the Fed’s trying to slow this thing down. I believe that banks are still wanting a big part of this business. It’s a good piece of business,” he said.
Mike Bowsher, president and owner of Carl Black Auto Group, which operates Buick, Chevrolet and GMC dealerships in Florida, Georgia and Tennessee, told AFN he is seeing a similar trends in his finance and insurance offices, noting that credit unions and some large banks are offering “pretty low interest rates.”
Still, most of the vehicles that are flying off the lots at Carl Black dealerships are high-dollar vehicles, Bowsher said. “The biggest pent-up demand right now is the most expensive stuff we sell — your full-size trucks … your full-size utilities and [vehicles] north of $70,000.” Many banks, such as U.S. Bank, for example, tend to originate loans mainly to prime consumers.
In fact, banks aren’t adjusting their rates as quickly as captives or other independent financiers as the Fed increases its benchmark, Bowsher said.
“You might have a situation where a big bank — a trillion-dollar bank — doesn’t move as fast as like a [captive or an independent financier] because they’ve got that banking arm and can get money way cheaper than these other folks can,” he said.
Consumers yet to be squeezed
For consumers further down credit tiers looking for more affordable, higher-mileage vehicles, however, credit is tightening, Bowsher said.
“We’re seeing a lot more pressure [on high-mileage vehicles],” he said. “You’ve got to make sure loan-to-value is right and you structure the deal right. You can get those deals bought, but rates are going up a couple points and it’s getting a little tighter.”
Auto interest rates have been rising since the beginning of the year as lenders prepared for anticipated rate hikes from the Federal Reserve, and rates have continued to rise in recent months. In May, the national average interest rate on new- and used-auto loans posted year-over-year increases for the first time since 2019, rising 8 basis points (bps) to 4.15%, and 6 bps to 4.2%, according to data and technology provider Curinos.
Rising interest rates have yet to curb consumer buying habits, though, Bowsher said.
“People understand rates are going up, they’re hearing rates are going up, they’re seeing the Fed on TV raise rates between banks,” he said. “They are seeing that, so they’re prepared when they come into the dealership.”
Rising interest rates have yet to dampen demand in the automotive space largely because a few percentage-point increases on an auto loan are not enough to materially affect monthly payments, Rutger van Faassen, head of innovation and new markets at Curinos, told AFN.
“People mostly buy their cars based on the monthly payment they can afford,” van Faassen said. “For a quarter [basis point] up on a $10,000 balance, that’s only $2 a month — that’s manageable. That’s not something that will immediately impact me.”
The 23rd annual Big Wheels Auto Finance Data 2022 report is now available, providing exclusive statistics on the auto lending and leasing industry and a ranking of the top 200 auto financiers in the nation. Order your report.