Carvana and CarMax AUTO INDUSTRY DISASTER | Episode 937

This is Kevin Harland. Tonight, the NBA on Prime Crew is back with another action-packed double-header. The night starts when Jalen Brown and the Celtics go toe-to-toe with Pascal Siacum in the Pacers. Then, James Harden and the Clippers take on the Portland Trail Blazers. If you're not a Prime member, just sign up for a 30-day free trial. The Celtics and Pacers, the Clippers and Blazers. Coverage starts tonight at 7 PM Eastern only on Prime.

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It's noon here in Venter City, New Jersey and our nation's capital Washington DC. And this is courage live for Thursday, October 2nd with your hosts, me, Ray here in Venter City and Zach. Well, in his living room in Washington DC. How are you today? Handsome of the Fantastic Dead. So glad to be here with you. Very excited for today's show. A friendly reminder to everyone that if we can help you out.

We've got an incredible team of people behind the scenes back at car edge dot com whether it be shopping for a new used vehicle or car buying services car edge insights. We can help your research, warranty, tracking your vehicle value that and so much more. Check it out. Back at car edge dot com. Now dad, the big story this morning really impressed by what the team over at CDC, CDG news has been up to they dug into the data. Dad, Carvana versus Carmax. Why their loan troubles are dictating the use car.

Car market and what dealers are doing about it. Now the moment you start to dig into this information, things very quickly become how do we say this dad bad. Here's the summary over on X again. Thank you to CDG for the great reporting here.

Carmax and Carvana's loan troubles are reshaping the use car market both groups 2024 loan pools are running hot.

Posting delinquencies two to three times higher than prime auto benchmarks and that's unusual because their average borrow scores for car max. It's about seven hundred and fourteen is the

FICO score Carvana 6.95 should be tracking much closer to prime instead delinquencies are climbing fast car max is pool is already at four and a half percent 30 day delinquency while Carvana's heavier sub primates is deteriorating even faster.

Those low remain low because lenders are increasingly stacking on payment extensions to keep loans alive between fewer cars cycling died to the lanes and a light of off lease volume and slower trade ins the whole sale supplies tightening just the competition of the auctions heats up to the high level here dad.

Yes, it's been a whole week of this is that auto lending and auto finance is screwing the car market and Carvana's car taxes auto loan performance is deteriorating indicating potential disaster.

For our dear friend the auto industry well it's more than a dear friend it's our lifeline it's our life it's our livelihood it's it's our livelihood this is this is how we make a living.

So I don't want to see the automobile industry collapse I wouldn't prefer to see some common sense applied when it comes to who we're lending money to and at the what loan to value ratios.

But this just this just indicates that the issues that we're seeing with these two and these are the two largest purveyors of pre-owned cars in America when you look at their numbers it's just it it's a preview of what the entire industry is going to be going through so if we see

loan delinquencies increasing at a dramatic rate at car max where the average credit score for their borrowers is 714 that's troubling now there are many who would suggest

Well the reason is because well those customers paid dearly for the cars that they bought they overpaid but that has nothing to do with the payment they signed up for they either knew they could or they couldn't afford to make that payment on a monthly basis.

But I think this is this is a broader issue for a much broader market and a broader economy that that we are on the brink of disaster and nobody really wants to admit it we'd rather stick our heads in the sand and just keep pretending to go on like we've been going on and it everything will be fine.

I don't know you're looking job creation and things like that it doesn't seem as if everything's fine I want to do dive into more the data and then I want to talk about what happens on the other side of this and what impact that'll have on use car pricing and for our community dad people who are in the market to buy new and use cars but first I want to look at some more data.

I'm ordering spars report on car vanes auto receivables trust twenty twenty four and three here we go folks were about thinking of the auto receivables trust is simply an asset back security that pays some returns you can think of it as a bond backed by packaged auto loans and now gets to the mortgage back securities of the past big financial institutions by these as they tend to have a higher yield car vana issues two types of these package products one is paid back by prime loans and one is and backed by non prime loans.

Look at the end the non prime tranches over the past year the average or only twenty three thousand dollars for non prime borrowers at car vana in this particular cohort we're looking at the average interest rate on those loans is twenty one percent the average loan term that is seventy two months these are this is carbon so obviously the old for use vehicles and the average loan to value ratio is a hundred percent the average flight goes by eighty we're just going to sit on this for a set.

The average fight go is five eighty for their non prime cohort okay well you know that that takes that that is a very special cohort but that the numbers I just read through are alarming for a variety of reasons and I want you to break them down primarily the fact that you have that interest rate for that long of a loan term for that price of vehicle is just a recipe for disaster which I want you to explain.

And then we are going to jump back to yesterday's show folks and talk about Wells Fargo because it puts into perspective how my dad likes to say nothing but what was part of what is doing right now is like.

Like oh my god okay but I'll pull the data back up but could you do me could you do me a favor yeah go to the so we know it's a seventy two month loan at twenty one percent interest okay.

And the average model is twenty three thousand I'm just curious as to what those payments are that that these the subpronged borrowers are having a hard time making so.

The other thing this shows is that you know maybe we shouldn't be making.

Credit so readily available for people who have shown in the past they can't.

Before we go before we go over to the auto loan calculator yeah easy to just put in a perspective for our community why these stats that you're looking at here are something that as as a community we should all strive to avoid putting ourselves in this situation help us understand that why I'm calling out hey.

It's an average car loan of twenty three thousand dollars and to use car for seventy two months why is that with ringing in the alarm bill for me why is twenty one percent interest bringing in alarm bill for me why is a hundred percent loan to value ringing in alarm bill for me.

Well you know the hundred percent loan to value it isn't nearly as greed as a greed just as what we know Wells Fargo's doing with up to a hundred fifty percent loan to value now.

Having said that if if the loan is based on a hundred percent of the value of the vehicle and the people aren't necessarily putting down a whole lot of cash.

They're basing it on the retail value of the vehicle which if I may help is higher than what it's real value is what do I mean by that the whole sale value is the real value.

And why is that the real value because if the vehicle gets repossessed it's going to be taken to an auction and sold there those are wholesale auctions they are nobody's paying retail price for them so just as a as a for instance.

If the if the value the retail value of the vehicles ten thousand dollars and the bank is financing ten thousand dollars and we know today that the average use car profit per used vehicle sold is somewhere around two grand.

That means that the wholesale value of that vehicle is really somewhere around eight thousand dollars and going down so that if you start the loan at a hundred percent of retail you're already financing twenty percent air yeah I think I'm just going to tell you what what stands out to me here this is what this is what I was hoping you're going to do but I'll take your reaction to it.

Twenty three thousand dollar car loan and we know car on a sales use cars that you overpriced older use car we know the quality of use car so that's one thing that stands out 72 month term on an older vehicle that's out of warranty is not great quality that stands out to me twenty one percent interest.

Sound stands out hey that's insanely high obviously for some primates not terribly high that's that's that's significantly higher than average which is fourteen percent for use car loan right now twenty one percent over a seventy two month term is absolutely nuts to me that's such a long time to be paying off interest and at a hundred percent loan to value for a seventy two month loan on an aged use car that is out of warranty.

Is bonkers to me because the bank is essentially underwriting an asset that is going to appreciate significantly and could have and has a like greater likelihood of having a major repair or break down so that's kind of the mixture that I see here pops I hear you on whole sale on retail values are different but.

Those are some of the key points I see that are saying this is trouble this is over all those are true and yes it's that's why I wanted to know what the payment is.

What do you think the payment is I got it loaded up over here I'm gonna flash on the screen you got a twenty three thousand dollar car you're financing it for seventy two months with twenty one percent interest that's the that's the the gist here folks what do you think.

Your monthly payment is on that and the other question i'm going to ask is what do you think the percentage is of your payments going towards principle and interest over the lifetime of that low.

Well i'm going to guess that the payment somewhere around five ninety a month okay so you're guessing around five ninety a month and do you think twenty percent of what you're paying is going back to print is going to be paid towards interest 100% that's not a hundred percent obviously paying that.

100% but you're going to your that car if it's six hundred hours times seven that's forty two so you're you're paying almost double the cost of the car with interest.

Alright folks here you go five hundred and sixty four dollars a month i was close so carvana based on that tranche of data we're looking at they can get people into what for those folks must be an affordable monthly payment five hundred and sixty four bucks a month that you're paying back seventeen thousand six hundred thirty four six hundred thirty one dollars and interest again on a twenty three thousand dollar loan forty three percent of what you pay is just interest over the lifetime of that low.

And and at five hundred sixty four dollars a month that is the average use car payment today okay so so somebody is paying back five hundred sixty four dollars a month for the next six years.

Oh when I can assure you that during that time it that vehicle will probably need some type of major repair that is going to be significantly more costly than the five hundred sixty four dollar a month car payment and more than likely that person will not have the money to take care of that major repair.

Let's let's actually do a live experiment usually we're on the car edge machine let's go to carvana okay let's see what is twenty three thousand dollars or excuse me what is five hundred and sixty four dollars a month get us looks like it's going to get us a relatively new but twenty twenty five used Chevrolet tracks with which I might add at twenty three nine ninety might be more than what it was the M. S. R. P. of the car before it became a used card card car.

Carvana let's see what else dad five hundred sixty four bucks a month would get you we've got any sunro with nearly twenty thousand miles that will get you.

You know around that price point and other Chevrolet tracks used one let's see what else what else what else let's find one more at twenty three this one's at another Chevy tracks that's a shiny track.

How about this let's see maybe Shack's favorites let's see Shack's favorites how about that first one that starts with the twenty three is okay.

So this is the question I have for you and everyone else here.

Is it a smart financial decision by a twenty twenty two Hyundai launcher with ten thousand miles on it for five hundred and sixty four dollars a month for a six year card note.

With you know twenty one percent interest because that's what people are getting themselves.

Is that a value that in good good decision I don't know man.

Well we know it's not because and then the reason we know it's not is because the first decision was to go to to Carvana and over pay well this is this is very true.

Carvana has the highest profit port per use car sold in the auto industry it's not even close any they make.

Like double what other you know dealers makes I think that's a really good call out that you want to get a great price on a used car.

You got to go negotiate out of dealership but even more so dad it's like the financing piece like you got to go to a little credit union things like that.

You know I have said it before and I will continue to beat this drug.

Carvana the only reason they're in the car business is so that they can be loan originators and then they can then turn around and sell those

car launches of loans to buyers of of security asset back securities like that.

And and that the vehicle to get to loan origination happens to be the sale of vehicles of automotive vehicles.

They're you know their whole concept is they want to be a loan originator at higher prices so they're generating larger loans on less valuable commodities than others.

Yeah and they claim and I I don't you know I we know the for instance like car max says that their average use car gross profits somewhere around $2,200 and that they make somewhere around 2000 in finance back end in F and I back in.

Carvana says that that their gross profit including finances like $7,200 which is what's the good work astronomical in comparison to their competitors.

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But that this is not just a car on the story let's go back to what the CDG team did this is a car max story to so let's look at this dad.

The link with these are climbing faster than normal and loan modifications lenders letting borrowers skip or extend payments which dad payment extensions are a slippery slope the interest compounds on a payment extension you're actually paying more interest if you extend.

Yeah but I don't think a lot of people realize that oh i'm just going to yeah okay here he goes here's the reality if somebody needs a payment extension they don't care that they're going to end up paying more interest they just care that they can stay in the vehicle that they have.

At the present time without it being repossessed so the concern of well well I either have a car to drive or I have more interest to pay back on the car that I have the drive they that second part of the equation never factors in.

Pops we've got to I need you after today show can you play around with your auto focus when you were supposed to figure that out for me I live in DC you live there I need you to figure it out because I want for you full screen again and live yourself i'm fuzzy why.

All right but that back to the car max data you're going to force me to go into the camera and push modes and so i'll see if I can figure it out I love you I appreciate you thank you dad.

The link when C's are climbing faster the normal and loan modifications like I said are increasing now look at this step this is the 30 plus data link when C 60 plus data link when C 90 plus data link when C for in this case this is one of those trust that one of those tranches of auto and look at the performance.

The link when C rates they're going up a lot okay this is the slope of these lines you know the 90 plus days is not nearly as aggressive but all of them are going up into the right and this is most certainly one of those charts where you do not want it going up into the right now dad the other piece to this puzzle that I find this is one of those charts where you want it going down into the right rising payment extensions and fewer repos are sitting wholesale supply making auctions more competitive so this is where we start to get into at least a little bit the impact on can.

And what's going on in the used car market in car in car max is 2024 pull the share of loans modified with two plus payment extensions has already jumped from under 0.1% to about 0.5% by mid 2025 so think about that for a second they've seen a 5 x increase in their customers who they wrote all the loans to saying we need to do.

Loan modifications in order for us to not have this vehicle repossessed repossessions over at car max have inched up from nearly 0% to 0.2% so still very low here I look at everything else that's that red line here but we're seeing that I mean a lack of repos because the banks in this case car max is being incredibly generous with loan modifications which again harm the consumer down the line because they're paying more interest but we are seeing repos start to go up a little bit and if you use maybe that modification line.

As a precursor and a foreshadow for what is to come you're going to have more repos so you know for the time being you don't have a lot of use car inventory because there aren't as many repos as there should be an eventually eventually it's going to have to come around.

It is it is a situation where in the short term it is beneficial to the bank because they will be collecting more interest okay.

So you know I remember in days of old when nights no that was something else but I remember in days of old when when I was in the car business and you know we'd have somebody with if he credit and then you look at their credit report and they just had a history of a long history of being late 30 60 days.

So any number of times during their previous loans yeah and and one of the ways I used to convince the buyer at the bank.

To say yes for the new loan was the was to say hey there they're interest makers they're they're making even more and yes they're paying late but but they're paying and so you have a fiduciary responsibility to your shareholders to get that return on their investment.

They're actually making you more money than somebody who has a good credit score and pays in a timely fashion and I I hate to admit how many times that that logic helped close alone for a customer that probably didn't deserve one.

But true and that so that's why you know these these lenders are doing loan modifications because for the short term it produces an increase of an unexpected increase in some of the profits which will look good in the short term in the long term might not quite work out the way you had hoped.

Definitely but yeah it's it's just it's just another example of all the issues that people are having out there absolutely that I think again another component to this is the inventory situation we have seen used car inventories increase their higher right now than they were a year ago.

And I think for all of us that are thinking about buying used cars the higher inventory goes the better off we are the more negotiating ground or leverage and so if there were more more these vehicles being repossessed like there are vehicles out there right now that should be repossessed today but there are not enough repo companies in the banks are doing what you just said trying to in the short term make things look better than they actually are which is constricting some of the increases in inventory so I actually think the potential buyers market on the use car side of things could be coming and actually could be quite strong if.

Some of these other pieces down the line start to so you know fold over as much as I would like to think that there's a buyer's market coming yeah when you when you delve into all this data instead of seeing a buyer's market I see a collapse okay there is only there is only so long that we can continue down this path.

Where everybody is so entirely over leveraged and and so you know we talk about it quite often I saw some headlines today that that they're expecting gas prices to rise to five hours or higher in some parts of the country so when that happens is that going to make it harder or easier for people to be able to maintain.

They're paying their lifestyles on a monthly basis based on their monthly expenses I'd say that's going to make it harder okay we know that automobile insurance rates keep going up we know that the cost to maintain and do repairs to your vehicle keep going up the cost of the replacement parts keep going up the cost for the labor to install those costly parts keeps going up.

What hasn't kept up with that wages so at a certain level when you really dig into this data are we really looking at a buyer's market or are we looking at a collapse of the market because there is so few people that are financially in a position to participate in the market which feeds the cycle which is why you see 72 month auto loans at 21% interest rate.

On older use cars that's what keeps being the cycle see no we're going to see next we're going to see approvals like the ones that we were talking about just the other day over at Wells Fargo where they're proving you have even worse credit you want to have more of a high loan the value ratio will approve it that's what keeps the merry go around going that's what he's the lights on in this industry to your point eventually the music stops and there's a collapse who knows if that ever happens we could be doing 10 year 12 year 15 year auto loans before you and I get to see the day.

That that comes I want to just pop a couple comments this is click that I don't think this is click this data that we have our hands on is alarming and if word people understood the implications of what's going on I think they would agree with us auto industry is in many ways the shapes and forms in a state of disaster I mean inventories growing up and the only way that we seem to be able to get people to keep buying cars is putting them in worse financial positions on older vehicles that are going to cost them more out of warranty that's disaster that today things look good today.

Carvana is an 85 billion dollar company today five years from now I don't know I'm paying for the chickens come home to roost it's it's not it's not clickbait when you really dig into the data it's it's clickbait if you don't want to look at the data if you don't want to believe the data you know then absolutely it's clickbait are is the automobile industry perhaps on the precipice of disaster.

I think the entire country so on the precipice of disaster because we focus here on what over leveraged and we focus we focus on you know I get that but you know sometimes the macro is equally as important as the micro and and so I just I just think that when you look at it when you look at that data it's it's telling you a story.

Okay and the story is people are finding it more difficult today to live and pay off all their obligations with what they are earning that is the story.

Well there's a no but you can't just end the story there dad because then the the other part of the story the continuation is so then people in big banks wall street finance companies are getting creative and get it.

Getting loose with their lending a guidelines to continue to keep the cycle going if you just stop with people can't afford things today then actually that wouldn't be a collapse that would be all right there's a slow down a recession the collapse potential comes from the fact that people cannot afford things today but financial institutions are engineering ways for them to be able to afford artificially engineering ways for people to be able to continue leveraging themselves beyond what makes reasonable sense.

Okay well anyway that was the carbon and car max data so obviously important that we dug into it math you're going to get us off that track and then I wanted to talk Volkswagen for a moment folks thank you Matthew here's more replops insurance quote for the Porsche 718 GTS 50% more car than the M4 same coverage 20% less graduated out of who is on those you can pay the most that's so interesting that you know two sports cars but the Porsche is got significantly lower insurance payment so fascinating.

Could that be because the amount of M4 sold is considerably higher than say that the amount of those that portions are talking about and and maybe what what insurance companies have seen is that those who can afford those particular horses are actually safer drivers than many of those who end up buying an M series.

Yeah and and have the they really should not be ever be behind the wheel of one now dad before we turn to the final story on today's episode of car edge live a friendly reminder car edge dot com if we can help y'all out please check out the website get some fun stuff coming next week cannot wait to share that with the community but folks take advantage of what we have back on the website the final story for today dad Volkswagen we've been talking about Volkswagen for over a year now they're struggling domestically

over in Europe and Germany but they're also struggling here in the United States sales actually fell for the second quarter in a row outie actually saw a little bit of sales growth but Volkswagen overall man there and not like they're kind of looking like slantist to point out I'm just calling it right now to a certain degree yes and and you know their their sales decline for this quarter would have been considerably worse had there not been the the car edge.

Pull ahead for EV sales yeah so due to the due to the federal tax credits going away yeah so yeah they they are struggling there's their sales right I forget what they were 6% 7% that number would have been significantly higher if they hadn't had a record month sewing ID for all right Josh

business on the spot recalled check and let's do it I haven't looked at the data so let me pull it up really last week they were forward was at 115 and counting fascinating we've gone backwards well how do you do that we're out 113 how do you do that just a curiosity really how do you do that how how could you have had 115 recalls last Friday through the last Friday's date

year to date and suddenly to recalls a fall and off really how does that happen I don't know keep me honest here guys I'll pull back up on the screen I go to

the same website each time this year yeah and I do remember last week it was 115 someone pull the tape someone pull the tape I think it was 115 I don't think it was I know it was

recall gate baby recall gate recall gate recall here on the recall gate on another scandal maybe that'll be a future show topic are you all we are not on the air

tomorrow I'll be on an airplane flying to the west coast my dad will be doing a news segment which which station a station in Columbus Georgia

okay so you're doing this nice that'll be so fun can't wait to watch it yes I have no idea who D is but I am

absolutely looking forward to meeting her and chatting with her tomorrow love that for you baby do just

a tinge of research but your your discretion but we'll be back on Monday can't wait for more car edge

live on Monday absolutely everybody have a great rest of your day have a great weekend and we look

forward hopefully to seeing you and many more back here on Monday see if I love you love you to handsome

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Carvana and CarMax AUTO INDUSTRY DISASTER | Episode 937

About this episode

Chevrolet Blazers

American Pacers

auto lending

loan to value ratio

loan delinquencies

auto receivables trust

non-prime loans

retail value

wholesale value

used car loan

interest rate

monthly payment

interest on a loan

used car payment

Chevrolet Trax

MSRP

Hyundai Elantra

Carvana

loan originator

Ford Explorer

used car market

repossession

automobile insurance

replacement parts

auto loans

market collapse

financial leverage

BMW M4

Porsche 718 GTS

EV sales

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