Car buyers saw credit access improve in July to the highest point since March, when the collapse of several banks caused lenders to adopt restrictive policies.
Cox Automotive’s Dealertrack Credit Availability Index increased 0.2% from June, meaning loan availability slightly improved. Although credit access remains more limited than last year, the shift suggests that car buyers are encountering some relief, especially for those purchasing used vehicles. The change is linked to higher approval rates in July, coupled with consumer-friendly interest rates. However, longer term lengths, a smaller share of subprime buyers, lower down payments and the declining presence of negative equity prevented a more significant recovery.
The widening of credit access establishes the trends first noticed in June when financial institutions cautiously began to loosen lending restrictions. The change has corresponded with an improvement in consumer confidence, which Cox Automotive reports increased 6.3% month-over-month and 22.8% year-over-year. More car buyers are now planning to purchase a vehicle in the next six months than at any point since last December.
However, several factors still stand in the way of a return to pre-pandemic lending norms. Car manufacturers are still pricing vehicles well above pre-pandemic averages. Only one model, the Mitsubishi Mirage, saw a sub-$20,000 average listing in July, compared to 12 at the same point in 2018. Car buyers are also disadvantaged by the Federal Reserve’s incremental interest rate hikes, which have limited credit access across the board. Despite dealership sales and earnings remaining high thanks to the premium segment, subprime consumers remain isolated by market conditions. However, these factors have also created opportunities for retailers. As loan restrictions begin to disappear, the industry could see an influx of returning consumers anxious to take advantage of better rates and loan availability. Provided dealers remain flexible on pricing, the influences of pent-up demand and wider credit access could limit the adverse effects of interest rate hikes and low affordability.