Surge in auto loan costs puts pressure on manufacturers to resume discounting

Rising borrowing costs, exacerbated by recent turmoil in the banking sector, have sidelined some buyers in the U.S. new-car market and put pressure on automakers to discount their cars.

Then cars became more and more affordable shortage Over the past two years, consumers have been forced to pay more than list price. The Fed’s efforts to curb inflation have pushed the average interest rate on a new car or truck loan to 8.95%, from 5.66% a year ago, according to Cox Automotive, which serves auto dealers.

Failure example of the month Silicon Valley Bank Other U.S. banks are also urging other lenders to tighten access to financing in the new-car market, where more than eight in 10 buyers are financing their purchases.

Jonathan Smoke, chief economist at Cox Automotive, said the turmoil has left banks “recognizing the risks they may be dealing with and basically trying to secure risk-adjusted returns.”

Financial pressure on consumers has resulted in discounts on dealer lots. Discounts, which can take the form of lease agreements, special financing rates or cash rebates, averaged about $1,474 per vehicle in February, or 3% of the average transaction price. While well below its historical level of 10%, it was the highest level in a year.

“The first dominoes that fell were actually the dealer markups we’ve seen in the last two years,” said Fitch Ratings analyst Stephen Brown. are watching.”

New car and truck prices remain historically high. The average transaction price (what buyers paid, including discounts) in February was $48,763, up 5% year over year. However, according to Cox Automotive, prices have fallen 1% since his January.

Higher car prices combined with higher interest rates are pushing up borrowing costs. Barclays analyst Dan Levy expects average monthly car payments to rise from $702 to $748 in the fourth quarter of 2021-2022 for a six-year loan on a $45,000 car. calculated to have risen.

Costs have pushed riskier subprime borrowers out of the market. Cox Automotive data shows that new cars and trucks will make up just 5% of the market this year, up from 14% in 2019.

Christy Elliott has seen the impact of rising borrowing costs at her Sunshine Chevrolet dealership in Asheville, North Carolina. Customers are more “cautious” about larger payments, including those who didn’t mind last year “because rates continued to rise fairly quickly.”

“It’s not that they can’t afford a car, but nobody wants to pay interest,” Elliot said.

Elliott said two lenders servicing Sunshine Chevrolet customers abruptly stopped offering loans in February without giving a reason, forcing dealers to continue offering favorable terms. I was. On used cars, he relies on GM Financial, the automaker’s captive arm, to offer customers rates like 4.99%.

“They really stepped up and offered very competitive rates,” she said. “They emailed us a few weeks ago right after SVB went bankrupt and only said they were very healthy financially . ”

But many buyers who fund new cars and trucks end up paying much more. Ally Financial, a market leader in auto finance, estimates that auto loan yields starting in the fourth quarter of 2023 will be 9.6%, compared with 7.4% a year earlier. The bank expects non-performing loans to rise to 2.2% of its average outstanding loans by the fourth quarter.

Analysts say auto makers need to make more cheap models to keep sales strong. When parts shortages limited the number of vehicles they could produce, automakers focused on making the most expensive versions of the most expensive cars and trucks and had no reason to discount their products.

General Motors said it continued to see strong demand for its products and that “strong pricing helped us grow our U.S. market share.” I predict it will drop. Ford’s chief financial officer, John Lawler, said at a conference last month that there is “room to improve dealer profit margins,” and he sees further discounting in the second half of the year.

Tyson Jominy, vice president of data and analytics at JD Power, said automakers are currently scrambling to sell as many cars as possible at high prices, but the pricing environment could get even worse. Stated.

“Gravity wins,” he said. “Prices will come down eventually. The fact that they were flat in the first quarter means it could slow down and the drop could be bigger.”