Automakers Could Suffer As Interest Rates Rise

Higher interest rates are going to impact many in the U.S. One such victim that shouldn’t be overlooked is automakers.

Long-term readers of Lombardi Letter have been warned about it over and over again. There were some sectors that got a boost from historically low interest rates, but as rates go higher, we could see them struggle.

iStock.com/Nuthawut Somsuk

You see, automakers had a great time during low interest rate period. Why? Because lenders were willing to lend to everyone.

Take a look at the amount of auto loans during the years that interest rates were low:

Source: “Motor Vehicle Loans Owned and Securitized, Outstanding,” Federal Reserve Bank of St. Louis, last accessed October 25, 2018.

In 2010, the amount of auto loans outstanding was around $700.0 billion. In the second quarter of 2018, that total stood at $1.12 trillion. That’s an increase of over 60% in about eight years.

And here’s the thing: more car loans equals more car sales.

Will Lenders Lend More?

Now the big question: will lenders seen as many loans as interest rates go up? Before going into any details, consider this: a lot of the auto loans were made to subprime borrowers—those with low credit scores.

In the wake of higher rates, lenders would certainly want to make more loans, but will potential borrowers be able to do so? Will they qualify to get an auto loan to buy a car?

This chart plots the year-over-year change in quarterly outstanding auto loans:

Source: ““Motor Vehicle Loans Owned and Securitized, Outstanding,” Federal Reserve Bank of St. Louis, last accessed October 25, 2018.

The Federal Reserve started to raise interest rates in the fourth quarter of 2015. Since then, we have seen the auto loan growth rate tumble.

Why Does This Matter?

The big thing going for automakers since the financial crisis was low interest rates.