Is this the start of a new era in auto lending?

Hey, everyone — What a week. After recording a phenomenal podcast in LA with Angela Zepeda, former CMO of Hyundai and current CMO of X, spending time at a Toyota dealer event with Jack Hollis and his team — plus — being shocked by the Jaguar rebrand… The team and I are now out in Scottsdale for Used Car Week.

Stay tuned to Car Dealership Guy News for our coverage of the event. And if you’re out at UCW too — give a shout to Jay.

—CDG

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The auto lending dam is finally breaking. Lately, I’ve gotten lots of DMs from dealers all talking about one thing: certain auto lenders are loosening up in a big way.

For much of this year, the lending landscape has been tight — high car prices and sky-high interest rates pushed borrowers to their limits, forcing lenders to tighten up. 

But recently, something shifted. Last month was the sharpest month-over-month increase in auto loan access since 2022, and auto credit availability increased for all lender types, according to Cox Auto.

The big question: Why have certain lenders decided to become more flexible now?

There are many reasons — but 3 of the main ones are:

1) Captive lenders are serious competition: The financial arms of automakers have an edge over banks, credit unions, and traditional lenders. Why? They can roll out more compelling offers like 0% APR deals designed to move metal and drive new car sales. And other lenders don’t want to miss out on the momentum that captives have built — so they’re adjusting to be more competitive.

2) Auto loan rates have started their very slow descent: Yes, rates are still high (relatively speaking) — but they’re finally lower than they were a year ago, thanks to moves by the Federal Reserve (see my newsletter from a few weeks ago). Even a small drop can make big waves. It’s a clear signal to consumers — and lenders — that the tide might finally be turning. For dealers, this could mark a pivotal moment as buyers start regaining confidence to jump back into financing those big-ticket purchases.

This chart nicely shows the rebound and positive trajectory of consumer sentiment in Oct.

3) President-elect Trump’s influence: Most business leaders I've talked to are pretty optimistic that the Trump administration's policies will lean pro-business, and that's lifting the mood. And by the way, there’s chatter about a tax deduction for car loan interest — a move that could put more money back in buyers’ pockets. If passed, it would incentivize borrowing and could nudge fence-sitters into action.

I also had some off-the-record chats with dealers about lenders, and here’s what they shared…

Wells Fargo: Is starting to approve 84-month terms, 135% loan-to-value (LTV) ratios, and subprime credit scores down to 540 — a total 180° from last year.

Chase Bank: Is becoming more bullish in underwriting the “right“ business and are willing to make exceptions like longer loan terms and additional advances.

Capital One: Is pushing beyond their current lending guidelines too, and will be more accommodating of exceptions when asked.

Ally: Wants “every loan application that dealers have even if they don’t fit Ally’s typical prime-risk credit profile” (although, let's be honest, every lender always says this). The company is broadening its pool of qualified buyers and pushing its 'Pass-through' program hard. If you’re not familiar, here’s the deal: when an application doesn’t meet Ally’s approval criteria, they pass it to partner lenders for a fee.

But there are still credit risks the industry can’t ignore.

• Subprime auto loan delinquencies (60+ days late) are tracking near the highs of the Great Financial Crisis at 6.12%, and prime delinquencies are also creeping up.

• Trade-ins with negative equity remain below the Q1 2021 peak (31.9%), but the average upside-down loan hit a record $6,458 last quarter.

• Over 54% of used car loans exceed 120% LTV, making both borrowers and lenders vulnerable to severe negative equity if resale values decline.

This graph captures just how high LTVs have grown over the past few years. Used car borrowers with LTVs higher than 140% have more than tripled (!) since 2021. 

The potential fallout? Handling more loans — especially riskier ones — isn’t cheap. Lenders might need to ramp up their underwriting, loan servicing, and collections teams, all while setting aside more funds to cover potential losses from bad loans. But they’re hedging their bets that growth in loan volume will offset future losses. 

So — what’s next?

The floodgates are opening, but how wide they stay might depend on who you are. Right now, the most flexibility seems reserved for larger dealer groups that can funnel high volumes of loan applications to lenders eager to gain traction. Smaller dealerships might still face stricter limits — but that will probably change soon.

Because auto loan rates are predicted to drop a full 1% by tax refund season (we’ll see if that actually happens), some lenders want to solidly position themselves in anticipation of that demand.

One theory? Certain lenders want to lock in loans at higher rates now, knowing a portion won’t refinance as rates drop. Yet – the lenders will have more favorable terms to refinance their own debts.

The big picture — We could be looking down the pipeline at a more open auto loan market than we’ve seen in years. And if that happens — the dealer community and consumers who have been holding out — will welcome it positively.

Before you go… what trends are you seeing with lenders in your store? Hit reply to this newsletter and let me know.

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Thanks for reading. See you on the next edition…

—Car Dealership Guy

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