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.
For consumers who purchase a vehicle, owning and paying for that vehicle has also become more expensive. According to Experian’s State of the Automotive Finance Market Report: Q3 2023, monthly payments and loan amounts experienced year-over-year increases across all risk segments. Economic data shows that the average annual cost of owning a car for the first five years has surpassed $12,000, up from about $10,700 in 2022, accounting for 16 percent of the median household income before taxes.
Credit unions can build consumer confidence
While these data points reveal growing consumer hesitancy, auto lenders can help potential buyers move beyond their second thoughts. Credit unions can give their members greater confidence to purchase with customer-focused education, more flexible loan terms, and valuable debt protection products.
Most consumers begin their buying research online, leveraging instant approval and monthly payment calculators to determine affordability. Getting the ‘wrong results’ can quickly turn a prospective deal into a ‘not right now’ decision. Rather than letting the opportunity pass as a non-starter, savvy lenders should proactively engage with those prospective deals, understand the buyer’s needs, and turn a ‘not right now’ into a ‘yes I can.’
Credit unions should increase online resources to educate consumers about the factors that impact lending rates. Update training scenarios with lending staff, focusing on consumer education about right-sizing the loan terms, loan , the down payment, and even the vehicle. Leverage consumer protection products and debt protection options to keep the vehicle on the road and the loan viable. And finally, make sure your dealer partners have a good understanding of your goals and priorities for your auto lending portfolio.
As we conclude 2023 and look toward 2024, we realize this year has provided some pluses and minuses. However, we are confident that lenders who bridge the gap between price and interest rates will set themselves up for success in 2024. Credit unions that focus on member education, flexible loan terms, and valuable consumer protection products will continue to see revenue strength throughout 2024.
Remember, your EFG team of experts is here to help you maximize your auto loan portfolio. We’re not just a provider; we’re a business partner.