Category: Business Growth

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Business Growth

Move Past Second Thoughts

Rising interest rates and inflated vehicle prices are giving consumers second thoughts on purchasing a vehicle. A recent McKinsey & Company survey revealed that 77 percent of respondents indicated that reduced purchasing power is causing them to either postpone large expenses or be more conscious about spending, impacting car purchases. Nearly 40 percent of respondents who had intended to buy a vehicle are postponing that purchase, while a quarter plan instead to purchase a more affordable car type, citing high car prices, lack of affordability, and high interest rates for financing as reasons for their decision.

The question of financing is top of mind for consumers, according to the McKinsey survey. About 80 percent of buyers in the United States chose to finance, while about 20 percent chose to purchase outright. According to Experian and StoneEagleMETRICs, cash deals have been on the rise since the fourth quarter of 2020, with a steep rise in 2022.

While consumer interest in financing reflects growing affordability concerns, consumers also are unwilling to sacrifice certain features. Between 30 and 50 percent of respondents claimed they are very likely to prioritize vehicle size, premium brands, or higher trim when purchasing a new vehicle. The balance of consumers is likely willing to compromise, given reduced purchasing power.

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Business Growth

Keep Your Eye on the Target

Credit unions have had a positive start to November, with good news on several fronts.

  • The Federal Reserve kept interest rates on hold for a second consecutive meeting, taking a cautious stance at a time when rapid inflation is retreating but has not reached the target goal of 2 percent.
  • Consumer spending ticked up to 7 percent in September from 4 percent in August, reflecting a relatively positive sentiment.
  • The Bureau of Labor Statistics reported that the U.S. economy added 150,000 jobs and the unemployment rate rose a tenth of a percentage point to 3.9 in October, positive news in the eyes of economists.
  • It also appears the union strike against the automakers has ended, pending contract ratification.

However, auto lending rates remain sky high with the average auto loan interest rates across all credit profiles ranging from 5.07 percent to 14.18 percent for new cars and 7.09 percent to 21.38 percent for used cars, pricing many would-be buyers out of the market. While total new-light-vehicle sales were up 1.6 percent in October from a year ago, the MSRP of those vehicles remained high and the average incentive spend from manufacturers declined 1.4 percent to $2,322, according to Motor Intelligence data.

Additionally, the Big 3 automakers have signaled that the costs accrued to come to an agreement with the United Auto Workers Union will be passed on to consumers, i.e., higher prices. Wards Intelligence estimates that the roughly 6-week long union strike resulted in 35,000 lost deliveries in October and November sales will continue to see some lingering effects. Used vehicle inventories remain challenging as dealers resist inflated auction prices and consumers continue to hold on to their vehicles. With all of this in flux, credit unions must keep their eye on the target for the remainder of the year.

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Business Growth Economy

Mid-Year Economics Impact on Auto Lending

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.

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