New and used vehicles are much easier to find this year now that supply chains are moving again. But now, car buyers may face another hurdle: getting a loan.
Earlier this week, Ally Financial said it plans to tighten standards for auto loans. Wells Fargo also said it is setting aside more cash in case its current auto loans go bad.
Lenders are worried that rising interest rates will make their loans too expensive.
“If people’s payments go up a lot because of interest rates, then lenders will worry about defaults,” said Kathleen Engel, a professor at Suffolk University Law School.
He said lenders are also worried that if a recession hits, some borrowers could lose their jobs, so they are raising rates even further to offset the risk. This also means they are making fewer loans.
“If lenders are concerned that higher payments will lead to higher delinquency rates, they want to stop the problem before it exists,” Engel said.
According to Jonathan Smoke, chief economist at Cox Automotive, lenders are pulling the plug on the used car market. He said that’s because many people who bought used cars in the last two years are already starting to fall behind on their payments.
“And the consumers who tend to be the most likely to be left behind are the subprime consumers, who also tend to be the average of the lower-income households,” Smoke said.
Those consumers are also the ones who have disproportionately felt the effects of inflation, he said.
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