Rising Interest Rates Are Back. What’s Your Plan?

During 1980, inflation reached double digits, and the Fed Funds Rate soared to 20%. It was a good time to invest in CDs, but not for taking out a loan to purchase a home or an automobile.

Pre-pandemic, the Fed Funds Rate was 1.75% and we experienced an inflation rate of 1.9%. During the height of the pandemic, the Fed Funds Rate went to 25 basis points (effectively zero). With the pandemic winding down and inflation soaring, it is not difficult to guess where we go from here.

Today, we are dangerously close to double-digit inflation, and the Fed Funds Rate is 100 basis points (1%) – up from 50 basis points just one week ago. In June, the Fed is expected to raise rates again, and the expected increase is 50 to 75 basis points.

Why does the Fed raise rates? To slow economic growth, bring down inflation, and provide a soft landing for the U.S. economy. If they miss on a soft landing, then we are looking at a recession. My opinion is we will see a recession, as I do not have confidence in the Fed’s ability to manage to a soft landing given all of the record levels of stimulus during the last two years. Q1 of 2022 was negative growth, and if Q2 is negative, then technically we are already in a recession. My gut says if we aren’t currently in a recession, it will happen Q4 2022 or Q1 2023.

Many of the experts are predicting wholesale used car prices staying at inflated levels for another 18 to 24 months. However, slowing the economy, a recession, and lack of disposable income will accelerate the decline in used car wholesale values.

Recently, it was announced that 67% of Americans live paycheck to paycheck and March credit card debt grew rapidly. Today, we are seeing food shortages, the highest energy prices ever, geopolitical pressures thought impossible just months ago, and – to top it off – an election year.

Déjà vu. We’ve been here before.

A Loan Originator’s Perfect Storm

Here’s what we’re facing in the days ahead. Does any of this sound familiar?

First: Dealers who do in-house financing and borrow money from traditional lenders will see their interest rates (cost of funds) increase quarterly for the next several years, reducing the dealers’ net profit. Dealers who provide indirect lending and sell loans to finance companies will see belt-tightening by those finance companies. Dealers who sell loans in bulk will see lower prices and more “putbacks” in recourse situations. Déjà vu!

Second: Cash flow will be significantly affected. The inputs (consumer payments) will be stressed due to a higher amount financed. Higher payment amounts caused by inflated used car prices will increase consumer payment defaults. Other inflationary pressure on the non/subprime consumer-like higher gas prices will also increase defaults. Dealers will pay a higher interest rate to their lenders, the cost of inventory will rise, and ancillary product costs will rise. Déjà vu!

Third: The combinations of high inflation and the possibility of a recession could put dealers in a bind as they did in the past. The failure of lenders like banks or rediscount lenders to recommit loaning their dealers’ money, changing loan agreements to protect themselves, or exiting the non-prime market entirely may negatively affect the ability of a dealer to survive. Déjà vu!

Will You Weather the Storm?

Dealers and independent finance companies are run by brilliant entrepreneurs and seasoned executives, and some have lived through a recession before. But none of us have lived through a recession, high inflation, crazy-high wholesale used car prices, trillions in stimulus, free money (zero Fed rates), a pandemic, remote workforce, potential for WWIII, double-digit stock market returns transitioning to a bear market, crypto million/billionaires, major supply chain issues … and I can go on …

Here’s what dealers need to navigate this unprecedented time:

  • Advanced analytics
  • Forward-looking macro and microdata
  • Prior experience
  • Recognizing the headwinds and having a strategic plan to address them

These weapons will separate the dealers who gain market share from those who lose market share in the days ahead. Which group do you want to be in?

When I talk directly with dealers, I hear too often, “I’ve been doing it this way forever and I will continue doing it that way.” The problem is, Blockbuster Video and Blackberry likely said the same things. In a quickly evolving industry, the innovators win. Those who are willing to adapt and make reasonable changes based on verifiable data will come out on top.

By future-proofing your business today, you can ensure your dealership is still standing – and even growing – when all this is over. Stay determined and seek out answers, because a one-size-fits-all solution doesn’t exist. Examine every aspect of your operations, capital, inventory, and current portfolio of loans. Above all, make a plan. This is no time to wing it.

Leverage Our Data to Your Advantage

I am a former Buy Here Pay Here dealer, banker, and a finance company owner, and the CEO of Agora Data, a company with advanced analytics and radical artificial intelligence (AI) with the use of unique, proprietary machine-learning (ML) algorithms all based on and developed with $76 billion of automotive loan data.

With that much data to work from, it should be no surprise that Agora’s AI/ML models are 98% accurate in predicting non-prime performance and cash flow. We model the loans in each dealer’s portfolio using advanced analytics, and we stress the many factors I have already cited here. Thousands of Agora members benefit from our experience and data-driven analytics using the AgoraInsights platform, and our data goes back to prior recessions and stressed points in time.

With AgoraInsights, there’s no need to be fearful of change. Because any actions you take will be based on millions of data points and billions of dollars in loans. You can innovate with confidence; the facts are literally on your side.

Oh, and did I mention that access to AgoraInsights is completely free, with zero obligation to partner with Agora in any way?

Low-Cost Capital is Finally Here

If you like what you see on AgoraInsights and you do want additional help, our groundbreaking crowdsourced securitizations coupled with the AgoraCapital line of credit protect dealers from rising interest rates with terms that ensure the dealer doesn’t lose their funding.

We love win-win-win solutions, and our reducing-interest-rate line of credit (the first ever in this industry) is a score for everyone involved:

  • Dealers get access to inexpensive, low-cost financing – a rare unicorn for the non-prime auto industry
  • Capital markets can invest in highly profitable non-prime loans with confidence in their performance predictability
  • Customers who have experienced financial difficulties can find the right car for their situation and start to improve their credit.

Get Started Now

Our data scientists and quantitative modeling experts will be at NIADA, TIADA, NABD, and other upcoming industry events. I encourage you to stop by the Agora Data booth and hear more about our strategies for future-proofing your business.

Regardless of the environment, Agora will continue helping dealers protect their cash flow and weather any storms with the most accessible and affordable capital available. Equally as important, we will help dealers strategically deploy that capital, making decisions based on real data and highly sophisticated analytics models.

It’s a thrilling time to be in the non-prime automotive space, and Agora is honored to play a role in advancing the industry forward. We believe in the entrepreneurial spirit of independent dealers across the country. We know for sure that, with the right tools, the sky’s the limit for your dealership.

To get started, visit us at www.agoradata.com or call us at 1-877-592-4672.