Thank you for the article. I was wondering if you can help summarize the type of risks CVNA is taking with the increasing loans held for sale? Like quantitatively what would be worst case impact of these loans?
Holding more loans on the books means they are taking on more credit risk than usual. Hypothetically, if default rates soared really quickly while they were holding more loans on the books, they would not be able to sell them for quite as much as they otherwise would be able to. On the other hand, we're probably not talking about more than a few months of holding these loans on the books. I'm not sure I'd expect a significant chance in credit quality that quickly. Also, Cox Automotive just talked about how more of the industry loan pool today is made up of prime borrowers because very few sub prime or deep sub prime borrowers are taking on auto loans at ~19% interest rates. It could be that management considers the risk of holding the loans for a bit pretty low because of that and the assumed short holding period.
Thank you for the article. I was wondering if you can help summarize the type of risks CVNA is taking with the increasing loans held for sale? Like quantitatively what would be worst case impact of these loans?
Holding more loans on the books means they are taking on more credit risk than usual. Hypothetically, if default rates soared really quickly while they were holding more loans on the books, they would not be able to sell them for quite as much as they otherwise would be able to. On the other hand, we're probably not talking about more than a few months of holding these loans on the books. I'm not sure I'd expect a significant chance in credit quality that quickly. Also, Cox Automotive just talked about how more of the industry loan pool today is made up of prime borrowers because very few sub prime or deep sub prime borrowers are taking on auto loans at ~19% interest rates. It could be that management considers the risk of holding the loans for a bit pretty low because of that and the assumed short holding period.
https://www.coxautoinc.com/market-insights/q1-2023-industry-insights-and-sales-forecast-call-replay-available/