The topic of interest rates is a popular one among lenders, sparked by the quarterly Federal Reserve meetings, and debated by those with contradictory opinions. As a case in point, let’s review the recent comments made by Moody’s Analytics during the Auto Finance News Performance and Compliance Summit. According to Michael Vagan, assistant director and lead auto economist at Moody’s Analytics, “The Federal Reserve waits too long to raise interest rates. They [the Federal Reserve] wait to make sure the economy is strong and inflation is growing – then they increase interest rates. But, what inevitably happens is they wait too long so then they have to act quicker and more aggressively to cool the economy down.”
In March, the Fed raised interest rates a quarter of a point to between 1.5% and 1.75%, and have signaled rates will be hiked two more times before the end of 2018. However, Moody’s believes interest rates will pick up steam much faster, predicting interest rates will be above 3.1% by 2019. The truth is likely somewhere in the middle. Regardless of what eventually comes to pass, forecasting interest rate hikes impacts auto lenders and consumers in the near term.
It’s time to plan
Unless your crystal ball has some magical powers, there is little you can do to actually affect rates. However, you can and should plan for interest rate changes. Develop a series of scenarios and build strategies to respond to each one. While it might seem counterproductive, the time spent on this exercise can mean the difference between a nimble response and being caught flat footed.
Communicate with consumers
Consumers often respond negatively to interest rate hikes. They perceive that their money will not go as far, and they curtail or delay major purchases. It’s important for auto lenders to clearly communicate with consumers about the true effects of various interest rates over the life of a loan. Continue reading