Category: Economy

It’s tax season and that typically means big business for those operating in the retail automotive space. Dealers and lenders alike benefit when consumers flock to dealerships in March and April with tax refunds in hand.

However, this year the IRS is reporting about an eight percent decrease in the average tax refund. Having already processed more than 13 million tax returns, the average refund is landing around $1,865.

What can that buy when it comes to vehicles? If we go by the standard of putting 20 percent down on a new vehicle and at least 10 percent on a used vehicle, $1,865 doesn’t go very far.

According to Forbes and USA Today, the average new car costs $36,000, and used cars are retailing at $19,657 on average. That means this year’s tax refund isn’t even close to covering the down payment for a new vehicle, and consumers will still need to come up with about $1,000 to meet the 10 percent minimum for a used car down payment.

What does this mean for auto lenders? Most likely, fewer consumers will be shopping for vehicles this spring, and those that are in the market will likely be shopping for used vehicles. As the pool of consumers shrinks, lender competition should increase.

Rapid changes are taking place in the way people buy things. The U.S. is moving toward a subscription-based economy, driving companies to focus less on individual sales, and more on gaining recurring customers. This trend is seen across industries, in companies like Netflix, Blue Apron, Spotify, Amazon, and now BMW, Mercedes, Audi and General Motors. But, how big is this market, and who is signing up for these subscriptions? More importantly, how does this subscription-based economy impact the retail automotive industry and the lenders who support it?

The subscription e-commerce market has grown by more than 100 percent per year over the past five years, with the largest retailers generating more than $2.6B in sales in 2016, up from $57.0M in 2011. E-commerce subscribers are most likely to be 25 to 44 years old, to have incomes from $50,000 to $100,000, and live in urban environments in the Northeastern U.S. Women account for 60 percent of subscriptions. But men are more likely to have three or more active subscriptions suggesting that men value automated purchasing to save time. These numbers track well with the potential prime auto loan customers that lenders crave, and they are reflective of the coveted Millennial consumer base.

There are numerous reasons why Millennials utilize subscription models, but one of the primary reasons is that this generation sees a greater financial benefit in accessibility over ownership.  Nearly 60 percent of Millennials would prefer to rent a home than buy one. They are also the leading proponents of the sharing-economy (e.g., Uber) – thanks to their financial position. Aside from record amounts of student debt, Millennials earn on average 20 percent less than Baby Boomers did at the same stage of life, according to the Federal Reserve. This disparity is the driving force for why Millennials did not run out and buy vehicles and homes as soon as they graduated high school and college.