2023 has provided some surprises so far for retail auto lending. While many predicted we would be in the midst of a recession, other factors have proven the economy to be more resilient for the first half of the year. For credit unions, there are some definite upsides, but a prudent approach keeps a close eye on the data for the remainder of the year.
Interest rates remain a concern
While the Federal Reserve paused its corrective rate hikes in June, rising interest rates continue to keep some consumers out of the market. According to Experian’s State of the Automotive Finance Market Report: Q1 2023, the average interest rate for a new vehicle increased to 6.58 percent, from 4.10 percent in 2022. The average interest rate for a used vehicle jumped from 8.67 percent in the first quarter of 2022 to 11.17 percent in Q1 2023. While Chairman Powell has signaled that the Federal Reserve will continue to use rate hikes to address inflation, it remains to be seen whether auto lending rates will continue their upward trajectory. If they do, then consumers may keep their vehicles longer or seek other options to meet their transportation needs.
Inflation eases, consumer confidence rises
According to U.S. Labor Department, the annual inflation rate declined from 6.4 percent in January to 4.0 percent in May. The U.S. Consumer Confidence Index also improved substantially in June, soaring to 109.7, its highest level since January 2022. It would appear that the economy and consumer sentiments are on the upswing – unless you are in the market for a used vehicle. While the Consumer Price Index for All Urban Consumers (CPI-U) across all retail markets rose by only 0.1 percent in May, when you break out the CPI for just used cars, it tells a different story, marking a steep increase of 4.4 percent.