Category: Economy

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Economy

The Fed’s Impact on Auto Lending

2022 has kicked off with some very mixed signals. While corporate earnings and retail auto sales closed out the 2021 fiscal year with strong numbers, the stock market has been on a roller coaster ride, and labor and supply chain issues continue to stifle growth. Adding to the confounding picture is the rate of inflation. At its current rate – 7.04 percent – most economists and investors do not expect inflation to return to anything like the double-digit levels that prevailed in the early 1980s. However, the rate of inflation and the contributing indices will still have an impact on auto lending in 2022.

Let’s look a little deeper into the details. The U.S. economy grew 1.7 percent in the fourth quarter, a 6.9 percent annual rate and its largest one-year jump since 1984. While impressive, the expansion reflects the depth of the damage inflicted by the pandemic in 2020/2021.

From a consumer standpoint, the rate of inflation is reflected in both the consumer price index and the personal consumption expenditure index — each climbed to a 39-year high last year. The cost of goods and consumers’ consumption of those goods has a direct correlation with inflation and purchasing power. To put it simply, you would have to spend 7.04 percent more money in 2022 than in 2021 for the same item.

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Economy

Economic Indicators Aid Forecasting

As we move through the second half of 2021, there are some economic indicators which should be considered when developing strategies for an auto lending portfolio in 2022.

According to Bankrate data as of June 30, 2021, the U.S. average rate for a 60-month new auto loan started the year at 4.24 percent and has dropped to 4.18 percent.  Similarly, rates on a 36-month used vehicle loan began at 4.53 percent and declined to 4.49 percent. The Federal Reserve has also signaled that it intends to keep interest rates low for the remainder of 2021 – and possibly into 2022.

Unemployment and growing debt are also important economic indicators to watch. According to Experian, the average annual percentage rates (APRs) on used and new car loans were 21.07 percent and 14.66 percent, respectively, for individuals with credit scores between 300 and 500. That compares with used and new car loan APRs of 3.71 percent and 2.41 percent, respectively, for those with top-tier scores between 781 and 850.

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Business Growth Economy

Putting Customers First to Increase Revenue

We are nearing the first full month with the new Administration and there has been a lot of activity from the White House. Vaccine distribution is rolling out, COVID-19 cases are trending down across much of the country, and Congress has a stimulus package to address. All of these actions bode well for the retail automotive industry. However, auto lenders have several other factors to consider going forward. The average interest rate on a five-year new car loan declined by 38 basis points, and the average four-year used car rate dropped 45 basis points during 2020 according to Bankrate.

Bankrate also predicts that new and used car interest rates will continue their downward trend.  With shrinking interest rates and reduced volume, what steps can your institution take to bolster its auto loan portfolios, especially when competing on a low interest rate is no longer enough to motivate potential buyers to choose your auto loan?

One option is actively promoting auto loan refinance options. Simply helping consumers save a dollar can increase your auto loan income exponentially in this hyper-competitive lending market.

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