From the November issue of UCD
Recent headlines have caused some trepidation in the used vehicle market, as sales have slowed, major players have filed for bankruptcy and delinquencies are on the rise.
Though there are concerns, lenders and floor planners are still working with dealers to supply capital to keep business going in the current market. Justin Makinson, Assistant V.P. of Finance and Lending at NextGear and Thomas Hawkins, President of CAR Financial Services, Inc., shared their views on the current market, lending and the future.
Perception of the current market
There are reasons to be cautious for dealers and lenders in today’s market, with uncertainty in several areas – employment, trade, interest rates, inflation and consumer confidence.
It also points to a market correction after the COVID-19 pandemic, which in the aftermath, brought extra money to the market and higher consumer spending. Now, many consumers have been forced to tighten their belts with higher prices of consumer goods and other factors, including the federal forbearance on student loans expiring.
“The market is stabilizing in the post-stimulus era,” Hawkins said. “The return to normal consumer performance has caused pain to lenders who may have overextended credit or terms to the consumer base beyond what they could sustain without stimulus. This has caused some consolidation and price correction in the market over the last 18 months. Thankfully, it appears that underlying asset prices are finding a steady foundation, and good operating dealers have adapted their underwriting to account for current economic conditions.”
Makinson agreed that it’s not all doom and gloom and some promising signs are being overlooked.
“There’s certainly optimism in the market, but most are labeling it as ‘cautious optimism,’” Makinson said. “Inventory levels are rising slightly while sales are beginning to slow, which is typical seasonality as we enter the fall. Dealers have tariff-related concerns and are waiting for the Federal Reserve to make further interest rate reductions.
“At a macro level, the stock market is doing well, unemployment is still low, and we have strong GDP growth. Many consumers are waiting on the sidelines while the Federal Reserve continues to consider lowering rates through the end of 2025. There’s likely a strong pool of buyers ready to re-enter the market as interest rates continue to fall.”
Credit availability for dealers
There has been widespread concern about credit availability in the aftermath of the Tricolor bankruptcy. But Makinson and Hawkins said their companies are not pulling back funding.
“While other floorplan companies may be starting to tighten in some areas, NextGear Capital remains committed to smart, sustainable growth with independent dealers,” Makinson said. “This includes growing with existing clients and helping new clients scale their businesses. We are staying focused on long-term performance and helping our clients navigate the ever-changing landscape of the automotive industry.”
Hawkins added: “We all see more caution in lending, which is what naturally happens when underlying asset values decrease. That said, I believe there is still good financial opportunity and access to capital for good operators from those of us who continue to buy or lend in all market cycles.”
Key measures to consider
Under the changing market conditions, lenders are still looking at many of the same metrics in making decisions on credit.
“Any lender is going to look at the standard financial indicators, and we’re no different,” Makinson said. “These are always helpful metrics, but some of our primary considerations are dealers’ ability to sell units and generate positive cash flow. These are key indicators of their operational health and traction in their local markets.”
Historical performance is also under more scrutiny.
“We look for dealer longevity in the market, for dealer LTVs to make sense, solid contracts and consumer documentation, and solid payment histories,” Hawkins said. “Just like CAR Financial, dealers with long tenures in the business have seen multiple business cycles and understand how to adapt underwriting to current economic risk. These attributes, along with access to capital, provide the best chances for continued success.”
Steps to protect lending relationships
Dealers should be focusing on solidifying their collections and underwriting principles to not only increase cash flow but also make them more attractive to lenders. They also should be looking to diversify and cultivate multiple business relationships.
“Success will come to those who have properly adapted their underwriting and have access to multiple capital channels,” Hawkins said. “In the last several years, we have seen much consolidation in the market. Dealers should make sure they have multiple avenues to access capital for ongoing operations and growth. They should be cultivating relationships with companies with strong histories within the industry. Dealers should keep updating their underwriting to keep the consumers in manageable contracts, all while using technology to aid in efficiency and performance.”
As with any business relationship, communication remains vital. Keep your lender updated on any issues.
“Strong lending relationships are built on transparency, consistency and performance,” Makinson said. “Dealers should focus on running disciplined, well-managed operations that demonstrate reliability to their lenders. That means staying current on obligations, maintaining clear and proactive communication, and showing a consistent ability to turn inventory efficiently.
“It’s also important for dealers to stay agile in today’s market, such as adapting to shifts in consumer demand, leveraging data to make smarter buying decisions, and using technology to streamline operations. Lenders value partners who are not only financially sound but also forward-thinking and resilient. By staying focused on fundamentals and being open to innovation, dealers can strengthen their credibility and ensure continued access to capital. NextGear Capital continues to look to expand relationships with clients in all phases of their dealership journey, including those who are just getting started as well as those who have been established for many years.”
Looking ahead
No one knows for certain what the next year will bring, especially with so much in the air on the geopolitical front. But the upcoming tax refund season, with larger returns expected, and the possibility of lower interest rates, gives a reason for some optimism.
“I’m optimistic about the remainder of 2025 and 2026. There will be an opportunity for those positioned to serve the market,” Hawkins said. “Some challenges remain in legacy portfolios, but newer originations look promising as most dealers have adapted to the current environment. Additionally, interest rates have begun to decline, aiding the consumer as well, along with the stabilization of asset prices. The longer those trends stay in place, the more opportunity for everyone to thrive.”
Makinson points out that amid the uncertainty of tariffs and the current government shutdown, employment remains high, and the need for reliable transportation is as important as ever. Quality used vehicle dealers are needed to fill that demand. “With the cost of new vehicles likely continuing to rise due to tariffs, used vehicles remain an increasingly reasonable alternative,” Makinson said. “Falling interest rates from Federal Reserve actions should help support vehicle sales, and gas prices trending lower this fall should boost consumer confidence over the coming months.”
