The Tesla CEO and others fear that rapidly rising interest rates has hurt automobile financing.
The car industry is one of the victims of Federal Reserve interest rate rises to squash inflation, which is at its highest in 40 years.
According to analysts, this monetary strategy has raised the cost of lending, especially auto loans. Rising interest rates will make customers rethink vehicle loans, Edmunds.com analysts say.
“Interest rates on new and secondhand cars are soaring,” a research company discovered.
Elon Musk sounds the alarm about a car crisis that is coming.
The CEO of Tesla and others worry that raising interest rates quickly has made it harder to get a loan for a car.
The Federal Reserve has been raising interest rates quickly to stop inflation, which is at its highest level in 40 years. One industry that has been hurt by this is the auto industry.
Experts say that this policy has made it more expensive to get credit, and especially to get a car loan. Experts at Edmunds.com recently warned that rising interest rates will make people think twice before rushing into a car loan.
The research firm found that interest rates for both new and used cars are going through the roof.
In October 2022, the average annual percentage rate (APR) for financing a new vehicle purchase was 6.3%, up from 4.2% in October 2021. This was the highest APR for a new vehicle since April 2019.
In October 2022, the average APR for buying a used car was 9.6%, up from 7.4% in October 2021. This was the highest rate since February 2010, when it was also 9.6%.
More people are choosing longer auto loan terms so they can pay less each month. In October 2022, 34% of financed new car purchases had an average loan term of 73 months or more. In October 2017, only 27% of financed new car purchases had loan terms of 73 months or more.
Situation Is “Alarming”
“When interest rates were this high before, consumers could at least count on lower vehicle prices and a wider selection to soften the blow,” said Jessica Caldwell, executive director of insights at Edmunds. “In this market, that’s just not true.”
On December 14, the Fed raised its benchmark lending rate by 50 basis points. This was the seventh increase in a year that added 4.25 percentage points to the Fed Funds rate. The Fed also said that there would need to be more increases. The central bank said that it is likely to raise the Fed Funds rate above 5%, which would mean at least another 0.75 percentage point in total increases, before keeping it there for most of next year.
This monetary policy keeps making things worse in the auto industry and has led to a crisis that could blow up in 2023.
CarDealershipGuy, an anonymous Twitter account run by an unknown CEO of a car dealer group, wrote on Dec. 15: “This morning I found out something extremely alarming is going on in the car market, specifically with auto loans.”
Even though the account’s owner is unknown, many people in the industry follow it because it has a lot of useful information.
CarDealershipGuy went on, “I’m now sure that there will be a huge wave of car repossessions in 2023.”
The CEO didn’t give his name, but he said that over the past two years, many people bought cars with huge loans at a time when car prices were going up. Because of problems in the supply chain, there weren’t enough cars for these people to buy, so they had to pay too much for cars.
Car prices are going down.
But the prices of cars are now falling. Some cars have lost a lot of their value, which puts some buyers in danger. They owe more than their cars are worth to the banks.
CarDealershipGuy said, “Every Friday, I have a team meeting to talk about our week.” “This morning, one of our general managers opened DealerTrack, which is a way for dealers to talk to auto lenders, and pointed out something very worrying.”
“9 of our lending partners have started WAIVING ‘open auto stipulations’ for consumers,” CarDealershipGuy said.
This means that a person took out an auto loan in 2020/2021 for a car that was worth more than it was worth. In 2022, the car’s value starts going down. If the customer wants to trade in the car, the dealer will say no because the customer still owes more on the car than it is worth.
So, the dealer will ask the customer to pay the difference, but the customer can’t. This is what CarDealershipGuy calls “the perfect storm.”
“The dealer can’t sell the customer a car, and the customer can’t buy a car. And, you guessed it, the lender can’t lend money to buy a car. Everybody loses!” said the CEO who didn’t want to be named. But “lender knows that most customers are stuck in this situation and does the following: Waives the open auto stipulation, which means that the lender lets the customer buy the car even though they already have an open auto loan with another bank.
“Mustn’t the lender know that people who get a second car loan are much riskier and have a much higher chance of not paying back? Right? Yes, but the lender does it because they know the customer won’t pay for the other car,” said the CEO who didn’t want to be named.
“Worst economic crisis ever”
CarDealershipGuy says that’s the “only way” lenders can finance cars and dealers can get them on the road. But this means there will be “tonnes” of repossessions.
The CEO of Tesla also said, “This could be the biggest financial crisis ever.”
In October 2022, the average APR for a used car transaction rose to 9.6% from 7.4% in October 2021, Edmunds said.
Car buyers are choosing lengthier loan terms to minimise monthly costs. In October 2022, 34% of financed new automobile sales had a loan period of 73+ months, up from 27% in October 2017.
Elon Musk, the CEO of Tesla, and Cathie Wood, a well-known investor, both agree that something bad is going to happen. They both replied to CarDealershipGuy’s thread and warned about how dangerous this situation could be.
“@ARKInvest has been worried about how falling residual values will affect the market for auto loans, which is worth more than $1 trillion,” Woods said on Dec. 15. “Most of these loans are for cars that run on gas. @GuyDealership says the crisis is already happening. This crisis will get worse as more people choose electric vehicles.
“The last time interest rates were this high, shoppers could count on cheaper car pricing and a wider selection,” said Jessica Caldwell, Edmunds’ executive director of analytics. “Not on this market.”
On Dec. 14, the Fed lifted its benchmark lending rate by 50 basis points, concluding a year of seven rises that added 4.25 percent to the Fed Funds rate. The Fed said more rises were necessary. The central bank said it would likely raise the Fed Funds rate beyond 5%, meaning at least another 0.75 percentage points, before remaining there for most of next year.
This monetary strategy has produced a problem that might burst in 2023 in the car sector.
“This morning I uncovered something extremely disturbing in the vehicle sector, especially auto financing,” CarDealershipGuy, an anonymous Twitter account, posted on Dec. 15.
Despite its mystery owner, this account is well-known in the business.
“I’m confident a tsunami of auto repossessions is coming in 2023,” CarDealershipGuy said.
The CEO said that in the last two years, many customers took out expensive auto loans while car prices were boosted. Because to supply chain issues, buyers have to purchase costlier cars.
Car values fall
Vehicle values are falling. Some autos’ falling values put purchasers at danger. Banks owe more than their automobiles are worth.
“Every Friday I summarise our week,” CarDealershipGuy remarked. “This morning, one of our general managers accessed DealerTrack, a platform dealers use to connect with car lenders, and saw something extremely troubling.”
CarDealershipGuy said, “9 of our financing partners are waiving ‘open vehicle conditions’ for customers.”
A client took out a vehicle loan in 2020/2021 on an overpriced automobile. In 2022, the automobile loses value. If a customer wants to trade in their automobile, the dealer will refuse since they owe more than the car is worth.
The dealer asks the customer to pay the difference, but the customer can’t, generating “the perfect storm,” says CarDealershipGuy.
“Vehicle dealer can’t sell customer a car, consumer can’t purchase. A lender can’t finance an automobile. All lose! said CEO. “Lender realises most customers are stuck and performs the following: “Waives the open auto requirement, meaning the lender allows the customer purchase the automobile knowing they have an open auto loan with another bank.”
“Must the lender know that borrowers with a 2nd vehicle loan are riskier and more likely to default? Right? The lender does so because they know the client would fail on the second automobile, the CEO said.
‘Worst financial crisis ever’
Per CarDealershipGuy, it’s “the only way” lenders can finance automobiles and dealers can sell them. It signifies “loads of repossessions.”
Tesla CEO Elon Musk and celebrity investor Cathie Wood see calamity ahead. Both warned CarDealershipGuy about this possibly catastrophic scenario.
“@ARKInvest is worried about diminishing residual values on the $1+ trillion vehicle loan industry,” Woods said Dec. 15. “These loans mostly support gas-powered cars. @GuyDealership reports a problem. The move to EVs will deepen this dilemma.”
“The largest financial disaster ever,” Tesla’s CEO said.