While consumer spending in the U.S. is still going strong, non-traditional consumer lending sources, such as finance companies, are scrambling to keep their doors open.
The financial squeeze that started about six months ago for non-bank companies that lend to ordinary Americans is getting worse, contrasting sharply with recent rallies in stocks and corporate bonds. The main reason: These finance companies have lost access to easy money.
Widespread economic uncertainty has made debt investors less willing to buy the bonds these nontraditional lenders issue. Higher interest rates, courtesy of the Federal Reserve, have given investors other attractive options.
Now, these finance companies are paying as much as four times what they paid in January to borrow in bond markets the cash they lend to customers. Plenty of them are struggling to make that math work. Once-highflying consumer-finance companies such as Pagaya Technologies have flipped from profit to loss. Some smaller firms are shutting down altogether.
Many of the nontraditional lenders launched within the past decade, which means they have never weathered a sustained period of high interest rates.
Pagaya and other startups such as Affirm Holdings Inc. and Carvana Co. aren’t banks, which means they can’t take deposits for funding. For borrowers with imperfect credit, these alternative lenders are sometimes the only way to get an auto loan, mortgage or buy-now-pay-later offer.
Bottom line – tread carefully. The companies whose spreads are being squeezed are now lending less and/or charging more for loans they do make, adding to concerns already swirling about the health of the economy.