Rising Interest Rates Create Shift in Consumer Lending Trends
The continued rise in interest rates has impacts that can be seen across all segments of consumer lending. Each market has needed to adapt its business strategy to accommodate both shifting rates and shifting consumer expectations. External factors, including September’s United Auto Workers (UAW) strike, have the potential to affect not only dealers and car production plants, but lenders and consumers as well.
Interest rates shift auto market share for banks and credit unions
The automotive finance market has seen a noticeable shift in trends in the first quarter of 2023. Experian’s State of the Automotive Financing Market Report revealed that a new vehicle’s average interest rate jumped from 4.1% in the first quarter of 2022 to 6.58% in the first quarter of this year.[1] Used vehicles also experienced an increase in interest rates from 8.67% to 11.17% this year. In response to this increase, consumers have begun to more frequently bring trade-in value to offset the rise of vehicle prices. Due to this practice, the average amount for used car loans dropped by $1,590, whereas in the previous year the average the used vehicle average loan amount rose over $4,000.[2] Experian reported that the average loan amount for a new vehicle increased by $1,213, whereas in the previous year there was an increase of just over $4,000. Consumers are exercising caution in vehicle purchases as the effects of the rising interest rates continue to affect their monthly expenses.
Typically, consumers elect for a longer loan term to lower monthly payment costs, but with interest rates on the rise, more consumers have opted for shorter terms to reduce the amount of interest paid overall. Captive finance companies currently offer the lowest average interest rates for new vehicles at 5.76% with credit unions coming in second, offering an average interest rate of 6.36%.[3] Credit unions also offer the lowest average interest rate on average for used vehicles at 7.93%. Banks offer on average an interest rate of 10.11%. Due to these market shifts, captives have taken advantage of shorter terms and lower interest rates and reclaimed the overall market share now at 26.59%. Banks’ market share decreased from 30.56% to 26.03% and credit unions increased from 22.40% to 24.53%.
Auto strike developments
The UAW began a limited strike in three auto plants after contracts expired at midnight on September 14. Eight weeks prior, UAW President Shawn Fain sent the union’s demands to General Motors, Ford, and Stellantis. These demands included a nearly 40% wage increase over the next four years for all UAW members, reinstalling cost of living protections, ending the current tiered system for wages and benefits, and job security in the event of plant shutdowns due to the shift to electric vehicles. General Motors, Ford, and Stellantis have offered to increase wages by 20% over the next 4 years.[4] The three automakers have seen record profits this year, bringing in nearly $21 billion.
During the 2008 recession, the UAW made certain concessions in their contracts to enable automakers to continue production amidst the growing economic collapse. UAW workers gave up “cost-of-living-adjustments, or COLA, as part of the concessions to automakers during the 2008 financial crisis.”[5] The UAW is seeking to bring back COLA to ensure that their wages are not overshadowed by inflation within the next contract cycle. The UAW is also seeking to improve worker healthcare plans and enable job security for its members. In a video statement on September 22, Shawn Fain announced that UAW members are ready to stage more walkouts across the country if the UAW demands are not met. Layoffs have already begun in GM and Ford as the strike continues and the strike is starting to expand to car-part distribution centers as well. The auto strike adds to the growing list of strikes held in diverse industries this past year. The time is quickly approaching where the effects of the UAW strike could trickle down to lenders and consumers if dealers are to run low on parts[6] and if domestic supply of new vehicles is impacted.
Housing
The housing market has also seen the effects of rising interest rates this past year. Rates for a 30-year fixed-rate mortgage sit at 7.67%[7] and the number of existing home sales decreased by 15.3% from the previous year.[8] The median sale price for a home is currently $407,000. Many home buyers are holding off on financing a mortgage loan in hopes that the rates will decrease. Federal Reserve Chair Jerome H. Powell has stated that inflation needs to decrease further before interest rates can be cut.
The Federal Reserve has increased interest rates four times in 2023 to fight inflation. While maintaining the current rate in September, officials have signaled that another rate increase in 2023 may be needed to further combat inflation. These housing market issues are also impacted by a supply shortage as builders are building new homes at a slower rate with higher loan costs. In response to this downward trend in existing home sales, Chris Rupkey, chief economist at FWDBonds LLC. said, “This tells us that there is a shortage of homes, affordable or unaffordable, and that upward pressure on home prices will continue, shutting a generation out of the housing market.”[9] At the end of August, the National Association of Realtors (NAR) identified only 1.1 million homes on the market, a 14% drop from last year and the lowest inventory level since 1999.
Going Forward
As interest rates continue to rise in both of these markets and as the UAW strike stretches into more facets of automotive production, lenders and consumers are faced with a unique set of challenges to overcome and navigate. Credit unions in particular face challenges in the management of their liquidity, with loan-to-share ratios and competition for deposits factoring heavily in their strategic planning. Partnerships with fintech providers can play an important role in helping institutions identify and promote cross-selling opportunities and leverage their member data to position their product offers competitively. ILT continues to monitor industry developments to ensure our product roadmap will support our clients in the face of these evolving conditions.
[1] https://www.experian.com/content/dam/noindex/na/us/automotive/finance-trends/2023/2023-q2-state-auto-finance-market.pdf
[2] https://www.cutimes.com/2023/07/21/auto-finance-market-shifts-as-interest-rates-continue-to-rise-in-q1/
[3] https://www.cutimes.com/2023/07/21/auto-finance-market-shifts-as-interest-rates-continue-to-rise-in-q1/
[4] https://www.washingtonpost.com/business/2023/09/15/uaw-strike-detroit-automakers/
[5] https://www.npr.org/2023/09/20/1200357955/uaw-big-3-strike-auto-shawn-fain
[6] https://apnews.com/article/uaw-ford-stellantis-general-motors-strike-labor-4132aa222c9a4456415af480d6fafa98
[7] https://www.forbes.com/advisor/mortgages/mortgage-rates/
[8] https://cdn.nar.realtor//sites/default/files/documents/ehs-08-2023-overview-2023-09-21.pdf
[9] https://www.washingtonpost.com/business/2023/09/21/housing-market-home-sales/
