2022 has kicked off with some very mixed signals. While corporate earnings and retail auto sales closed out the 2021 fiscal year with strong numbers, the stock market has been on a roller coaster ride, and labor and supply chain issues continue to stifle growth. Adding to the confounding picture is the rate of inflation. At its current rate – 7.04 percent – most economists and investors do not expect inflation to return to anything like the double-digit levels that prevailed in the early 1980s. However, the rate of inflation and the contributing indices will still have an impact on auto lending in 2022.
Let’s look a little deeper into the details. The U.S. economy grew 1.7 percent in the fourth quarter, a 6.9 percent annual rate and its largest one-year jump since 1984. While impressive, the expansion reflects the depth of the damage inflicted by the pandemic in 2020/2021.
From a consumer standpoint, the rate of inflation is reflected in both the consumer price index and the personal consumption expenditure index — each climbed to a 39-year high last year. The cost of goods and consumers’ consumption of those goods has a direct correlation with inflation and purchasing power. To put it simply, you would have to spend 7.04 percent more money in 2022 than in 2021 for the same item.
New car prices surged to a record average of $47,077 during December, according to a report by Kelley Blue Book, up 14 percent from December 2020 and more than $10,000 above what the typical buyer paid pre-Covid. Analysts expect prices to rise another 3-5 percent in the coming months as the chip shortage, COVID impacts to labor, and continuing supply chain issues hamper dealer inventory.
Actions at the Fed
The Fed has pivoted sharply from boosting growth during the height of the pandemic, to preparing to cool down the economy as businesses report widespread labor shortages and as prices continue to soar. It is the Fed’s job to keep inflation under control and they have begun to signal efforts to make the cost of borrowing for a vehicle purchase more expensive.
The Fed’s withdrawal of policy support could temper consumer demand as the cost of borrowing money to buy a car becomes more expensive. While recent comments from the Federal Reserve Chairman Jerome Powell were not specific, hikes are expected in March, June, September, and December. The Fed anticipates that its longer-run interest rate might hover around 2.5 percent.
What does this mean for auto retail lending? Adding value to each loan will become an even greater imperative. Consumer protection products, like a vehicle service contract or vehicle return protection, provide consumers with the ability to either stay current on their auto loan payments, or return their vehicles with no damage to their credit should unforeseen circumstances occur, like job loss. They also provide lenders a way to differentiate their auto loans in the market to increase loan volume and profitability through upsell options. They are the total package solution, providing a simple solution to both the auto loan and risk challenge auto lenders are facing today.
With more than 40 years helping lenders achieve their profitability goals, EFG Companies structures its products and services to provide value to you and the end-consumer. Our unmatched client engagement model goes well beyond simple product innovation to mitigating liability through superior claims processes, and continuous training and compliance practices. Contact us today to stop competing on APR and start competing on value.