The business of auto lending remains immense. More than half a trillion dollars are borrowed every year by American consumers to buy cars – even as vehicles get more expensive and interest rates hit levels higher than they have been in two years.
The rising costs of both vehicles and money, along with other market dynamics, have led J.D. Power and other industry observers to predict fewer auto buyers will enter the market as we close out the decade.
That means auto financing will become even more competitive, forcing lenders to re-evaluate their strategies for both new- and used-vehicle buyers.
Lenders will focus on maintaining credit quality in their portfolios and improving loan-origination efficiencies.
This will require effective management of the lender-dealer relationship and coordination with manufacturers to ensure consumers are equipped with the resources needed to maintain a healthy market.
Consumers entering or returning to the market are wrestling with what to make of today’s more expensive environment. They are more actively exploring a wider range of financing options.
We are noticing consumers, absorbing the immediate aftermath of the sticker shock that comes with the 2019 model offerings, are expressing a greater willingness to go down market with their next new purchase. Some heretofore new-car buyers may even consider buying a used vehicle.
As vehicle buying gets pricier, we have seen lease penetration rates (nearly 30% of the transactions that move vehicles off dealers’ lots) remain strong.
In addition, consumers are willing to extend the terms of their financing over more time. It is not uncommon to see 72- and even 84-month loans to help consumers hold the line in their monthly payments.
We’ve seen about a 2% rise in deals that have moved in this direction. At today's higher interest rates, this can be good news for lenders. Yet for dealers and manufacturers, it may keep shoppers out of the market for longer periods.
We’ve also seen a growing number of consumers hang on to their vehicles after loans are paid off, and further harvesting savings by reducing their insurance premiums.
A Prudent Path Forward
Major variables are gradually shifting at this point.
It is too early to tell whether dynamics will accelerate to a pace that causes serious market disruptions. That is more reason for automotive industry supply chains – including independent and captive lenders – to monitor and coordinate responses to changing consumer behaviors in a costlier market.
J.D. Power has seen the positive results that come from partnerships among the manufacturers, dealerships and lenders, including captive and consumer-chosen financial-services providers.
A joint understanding of how to provide proper context and services to consumers has driven alignments in messaging and consistency. That’s led to positive customer experiences despite the price hikes. (Wards Industry Voices contributor Andrew Stowe, left)
When the value propositions of all three parties are tightly integrated, it lays the foundation for providing the shopper with the best information for making appropriate purchase decisions.
Andrew Stowe is J.D. Power’s senior director-vehicle valuations.