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Interest rates drive uptick in captive finance companies' market shares.

Dealers Face a Double-Edged Financial Sword

Affordability and inventory are up, but interest rates cut gross margins.

Some trends in auto finance are moving in the direction of better affordability. That includes modestly higher new-car incentives in an environment of better new-car availability. There are also declining used-car values, but high-interest rates keep monthly payments high.

“Interest rates are the main driver here,” Satyan Merchant, senior vice president and automotive business leader at TransUnion, tells Wards.

TransUnion reports pricing finally may be peaking in its recent TransUnion Credit Industry Insights Report for the second quarter.

That peak cuts both ways for dealers. Better affordability and better availability should stimulate higher sales volume. But gross margins per vehicle are taking a hit, according to second-quarter earnings reports from the six big, publicly traded dealership chains.

TransUnion reports the average amount financed on new-car auto loans and leases was roughly flat in the second quarter vs. a year ago, at $41,240, up less than 1%. For context, that’s up $4,627, or 12.6% higher than the second quarter of 2020.

On used vehicles, the average amount financed in the second quarter was $26,485, down 6.3% vs. a year ago, TransUnion says.

Nevertheless, due to high-interest rates, the average monthly payment still increased in the second quarter vs. a year ago for new and used vehicle financing.

The average monthly payment on new was $739 in the second quarter, up 9% vs. a year ago, even though the amount financed was flat vs. a year ago.

On the used-vehicle finance side, the average monthly payment was $532 in the second quarter, up 2.3% vs. a year ago. That’s not much of an increase, but it’s contrary to the fact that the average amount financed went down.

Merchant says the average new-vehicle finance rate was 6.8% in the second quarter, up from 4.7% a year ago. For used vehicles, the average rate was 11.9% in the second quarter, up from 9.2% a year ago.

Another result that dealerships are bound to feel is that captive finance companies are gaining market share, as new-vehicle inventory improves and incentives make a more substantial appearance.

“A lot of the reason is manufacturers finally have more vehicles, more new vehicles, on their lots. While APRs are higher across the board, we see more shares of APRs below 2%, which means more subvented loans are being offered,” Merchant says, referring to the annual percentage rate,

TransUnion says 6% of new-vehicle financing in the second quarter had an APR of 2% or less. In the fourth quarter of 2022, that share is only 3%.

“That 6% is much lower than normal times,” Merchant says. “But it’s an upswing.”

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