There are serious warning signals coming from a variety of markets, including the used-car loan market.
Every Friday I conduct a team meeting to recap our week.
This morning, one of our General Managers opened up DealerTrack — a portal that dealers use to communicate with auto lenders — and highlighted something very concerning: 9 of our lending partners have started WAIVING “open auto stipulations” for consumers.
Wait, wtf does that even mean? Let me explain using a simple, hypothetical scenario:
1) Consumer takes out an auto loan in 2020/2021 on an overvalued car
2) 2022 comes around and that overvalued car is now rapidly declining in value
3) With the car declining in value, consumer now owes more on the car than it is worth
4) Consumer no longer wants the car. Maybe they outgrew it. Or maybe it keeps breaking. So consumer wants to trade it in.
5) But dealer can’t trade the car in because the consumer owes WAY too much on it.
So dealer asks consumer for lots of money down to cover the difference.
6) But of course, the consumer doesn’t have $1,000s to cover the difference between what they owe on the car and what it’s worth. And here comes the perfect storm…
7) Dealer can’t sell consumer a car, consumer can’t buy a car, and, you guessed it, lender can’t finance a car! Everybody loses! Oh no! So what happens next?
8) Lender knows that most consumers are stuck in this situation, and does the following:
WAIVES THE OPEN AUTO STIPULATION.
Meaning, the lender lets the consumer buy the car KNOWING that they already have an open auto loan with another bank!
It’s becoming apparent that 2023 has the potential to be worse than 2008. How much worse, we will have to wait and see. In the meantime, it’s a very good idea to be prepared to lower your standard of living and focus your spending on a) things you really need, b) things that will last, and c) things that provide high value for the money.
Live well within your means and you’ll be all right. This is not the time to live a champagne lifestyle on a discount beer budget.