By Ray Birch
CAMARILLO, Calif.—Advertising the lowest car rate in town no longer guarantees a credit union will see its auto loan portfolio grow, says one expert, who emphasizes that those who focus on a different number will be the winners in 2023.
Reflecting what is going on in the market, today’s wisest lenders are changing how they approach marketing their auto loans, says Rusty West, president and CEO of automotive retailing firm Market Scan.
“They are structuring their loans and deals to focus on monthly payment,” said West. “You can get this car for so much a month, etc.”
West compared the shift to how dealers market their own cars.
“There is always the rate that needs to be considered, the term length, and so on,” explained West. “But consumers anymore really don’t care that much about those components of a car deal, they want to know how much it will cost them each month. Rising interest rates, along with still-lower inventories, continue to make it more difficult for car shoppers to afford record-high prices on new vehicles.”
The average interest rate on a new car loan in the U.S. hit 5.16% in the third quarter of 2022, the highest in three years. The average rate for used cars reached 9.34%, according to Experian's State of the Automotive Finance Market report for the third quarter.
Financing More Than Ever
The Wall Street Journal reported Americans also are financing more of the purchase price than ever, which isn’t surprising given the appreciation in vehicle prices. The average amount financed per vehicle in the third quarter was $41,347, compared with $38,315 a year earlier. And 14% of auto-loan customers during that same period took on a monthly payment of $1,000 or more, up from 8% a year earlier.
West said the rates, terms and FICO scores will eventually be used by lenders as largely internal elements of a deal, along with market analytics, to determine how to present some of the lowest monthly payments on cars in a lender’s market.
“Again, credit union members are caring less about these complexities and just want to know how much they will pay each month,” said West. “I mean, if I can get a brand new Ford F150 for $400 a month with nothing out of pocket, I am taking that deal, even if my intertest rate is high.”
A Need to Respond
Another change to which lenders must respond: automaker incentives are coming back. West explained that after over two years of pullbacks on incentives due to demand far exceeding supply, the cash-back offers and subvented financing have accelerated back into the market as new car production returns to more normal levels in 2023.
“There have been much fewer rebates and incentives over the last several years, all tied to the new car inventory,” said West. “When demand is high carmakers don't have to subsidize cars rolling out the doors. However, expect to see incentives coming back this year. Inventory levels are going to start ramping up as normal production comes back. GM thinks they've solved the chip problems—at least they have better access to chips. We still have wiring harnesses out of the Ukraine that are an issue, but the supply chain issues are getting sorted out.”
West forecast that inventory levels will noticeably increase as the year begins.
“And, as inventory picks up prices will go down. I think in Q1 and Q2 of this year supply will exceed demand,” predicted West, adding that will be the catalyst for
Rusty West
automaker incentives to return.
Concern Over Negative Equity
As several analysts have stated, after several years of inflated values, falling new car prices will negatively impact used car values, as CUToday.info has extensively reported. And that has West concerned, as he sees a growing negative equity problem for lenders developing.
“We're seeing some of the highest repossession rates we've seen for years,” said West, who added some rental companies will be putting a sizeable number of their vehicles on the used market in 2023. “I think this is a year in which we see used vehicle values plummet.”
As CUToday.info has reported, used vehicle values, while still above pre-COVID levels, began falling in the fourth quarter of 2022.
“We're going to have customers one, two and three years down the road trying to get out of their cars and there is going to be massive negative equity,” predicted West.
A Comeback for Leasing
One thing that will help consumers with rising monthly payments and negative equity is leasing, said West, who believes leasing will increase this year.
West is the second person to tell CUToday.info the market should experience a leasing comeback this year, as reported here.
“Leasing is a really good mechanism for addressing negative equity,” he said. “If you're four or five years upside down on your car, you roll that into another finance contract and you're in it for another seven or eight years, and the dealer never sees that customer again. You put them in a three-year lease, and while the payments are going to probably be about the same, in three years that customer has a clean slate and the dealer has a chance to get another lease. Leasing is coming back this year.”