Categories
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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Categories
Economy

Play to Your Strengths for Success

The end of 2023 is on the horizon and lending in the retail automotive market seems a bit topsy turvy. Let’s consider a few data points:

  • August jobs report reflected an additional 187,000 jobs – but the unemployment rate jumped unexpectedly.
  • The Federal Reserve has paused interest rate increases for the time being – but inflation rose 0.6 percent in August to 3.7 percent, its biggest monthly gain of 2023.
  • While it seems the economy is cooling, the average interest rate on a new car is 14.09 percent and 14.34 percent for a used car.

The car buying consumer is in the midst of these juxtapositions. More people are employed than before the pandemic, but the ‘value’ of their paycheck continues to be hit hard by inflation. Availability of new and used vehicles is improving, but the ‘cost’ of a loan feels exorbitant, pricing many people out of the market. And, if the buyer has a vehicle to trade with a balance owed, the impact of negative equity may come as a surprise. According to Edmunds, the average negative equity value of auto trade-ins was $5,445 in April 2023, up nearly 24 percent compared with the previous year.

As a lender, what options are available to your team to continue to grow a strong lending portfolio while keeping customers out of a potential delinquency position? Here are some maneuvers that require a sharp pencil but should result in a win-win for both you and your customer.

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Categories
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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