Carvana Cracks Down on Lending as Risks Rise

In response to a rise in auto loan delinquencies, Carvana has revised its lending standards, demanding higher down payments and imposing limits on loan payments. Chief Financial Officer Mark Jenkins highlighted the tightening of credit issuance, with Carvana reducing its lending to lower credit tiers by about a third.

The adjustment comes amidst broader industry concerns, with the Federal Reserve Bank of New York reporting a 7.7% increase in transition into delinquency for auto loans. Younger borrowers, in particular, are showing increased rates of serious delinquencies.

Despite booking $150 million in net income for 2023 and a strong revenue stream, Carvana confronts substantial net debt, with interest payments rising sharply compared to the prior year. The online car retailer is actively hiring, signaling growth intentions, and is committed to its strategy of securitizing consumer loans in 2024 after completing several securitizations in the previous year.

Our Opinion:

The reported industry-wide rise in delinquencies, which are now transitioning at an annualized rate of 7.7% into delinquency status, is an important signal. It signifies that Alternative Lenders should examine their portfolio and underwriting practices more closely to ensure they are prepared for a potential increase in loan defaults.

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