Edit: this blog post has been updated to reflect the early 2023 market shifts that were predicted at the time this article was originally written.
On the strength of solid demand despite rising interest rates, North American new vehicle prices reached a record high of $45,844 through the summer of 2022, meeting the industry’s forecast from earlier in the year. Coming hot off the heels of chip shortages, supply chain woes, and a global pandemic, car prices have had no choice but to increase. So how has the market responded?
According to credit monitoring business Experian, North American customers responded to rising new car and truck prices by taking on more debt in 2022. The average loan amount for new automobiles and trucks increased to a record-high $40,290 during the second quarter.
In short, customers have been willing to pay more for the cars they want and take on more debt. But can it last?
Limited inventory due to a persistent shortage of computer chips, along with other supply-chain challenges, helped propel new car prices up 12.6% from a year ago and used car prices 16.1% higher, according to the latest data from the U.S. Bureau of Labor Statistics. - CNBC
Update: 2023 Predictions Hold True - And Why Creative Solutions Will Be More Important Than Ever
This recent Twitter thread from Car Dealership Guy chronicles the staggering number of car subprime credit car owners going into 2023 with an open car loan - 37.5%, in fact. This poses major concerns for dealers as the folks who accumulated auto debt through the early pandemic amid rising car prices are now left with cars and loans that they can't get out of.
In another staggering statistic, used car prices fell a drastic 14.9% year over year in December 2022, just ahead of the new year. It's the largest decline ever recorded in the automotive industry. Again, you can catch up on the Twitter thread via Car Dealership Guy's profile here.
This data has a lot of implications for dealers:
Just how much will the retail automotive market correct itself with increased supply and lower demand?
When the “auto-boom” cools, have you worked enough on your brand to maintain a high level of sales?
How can you manage your inventory data to ensure you purchase enough of the right vehicles and products?
Is there a right time to start lowering prices to remain competitive?
Is your sales team ready to meet the needs of a new market of car shoppers?
Do your support departments (finance, service, parts, administration, marketing, customer service) have the tools they need to meet increased demand and stay connected with these customers?
Are your digital marketing efforts helping you get your vehicles in front of eager shoppers before your competition?
Monthly Payments for New Cars Soar
According to Experian’s most recent study on the automotive finance sector, the average monthly payment for a new car loan increased to $667 in the second quarter, up nearly 15 percent from a year earlier. The average amount borrowed increased by 13.2 percent.
Just over 69 months was the average term of a new car loan in the second quarter, unchanged from a year earlier.
A supply deficit is nevertheless constraining new vehicle sales. According to analysts, retail sales of new cars are anticipated to fall 2.6% from a year ago to 980,400 units in Q4.
Today’s Unique Market for New and Used Cars
The price of new automobiles in North America has been rising faster than the rate of general inflation, despite the Federal efforts to calm the economy by hiking interest rates.
In fact, the most recent prediction shows that the auto industry, which profited from customers’ desire for personal transportation during the epidemic, has not yet been significantly impacted by the government’s quick pace of interest rate hikes to control inflation. Quite the contrary, folks are taking out higher loans and absorbing soaring interest rates to get their hands on the cars they want, making the automotive industry a leading contributor to rising inflation.
This puts car dealers in one of the most interesting positions in decades. As supply takes its sweet time to rebound, both customer demand and willingness to take on more debt remain high. This has allowed dealers to raise prices higher than ever before, but also caused a lot of tension about acquiring enough inventory to meet demand.
It’s also increased competition among dealerships and highlighted the importance of branding. It’s more important than ever to focus on why customers should choose your dealership over the one down the road. What do you offer that’s unique? Is it fun giveaways? Your commitment to the community? Communicating values that align with modern shoppers?
How Shoppers are Working Towards Reduced Car Loan Payments
Just because customers are willing to accumulate auto loan debt right now doesn’t mean this trend will last. Financial institutions are working hard to advise shoppers on how they can reduce their loan payments and get approved for car financing with lower interest rates, and customers in turn are working hard to manage the weight of automobile debt.
Here are just a few of the ways that car buyers are making it all work:
Building credit. Increasing one’s credit score is a great strategy to minimize interest rates on a new automobile.
Spending less. Saving money for a dream car requires trade-offs in other areas, such as reducing discretionary spending. This can be anything from skipping a daily latte to taking fewer vacations. Even a $50 weekly savings grow to $2,600 a year.
Getting a “side hustle.” With more flexible employment schedules, people are working extra hours in their spare time to afford what they need.
Shopping used. Despite the increasing prices, used vehicles are still less expensive than new vehicles, and many customers are going this route.
So why does all of this matter? Well for one, it’s vital that dealers remain in tune with their customers. You need to understand their motivations and how they plan to get approved for vehicle financing in order to purchase a new or used car from your dealership.
Understanding customer motivations can also help inform your marketing strategies. Perhaps you need to find new ways to entice your customers to choose your dealership by offering rebates, low-interest financing incentives, free ongoing maintenance offers, and other perks that help offset the rising cost of new vehicles. One of our clients decided to run a simple “No Promo Promo” this fall, where they’re simply slashing prices in order to help their customers get behind the wheel of vehicles they love.
Further, not every dealership has the luxury of being located in a geographic area where folks can simply “take on more debt.” Plenty of rural areas across Canada and the United States are populated by hard-working people who won’t be approved for the car loans they need or will be edged out of making a purchase due to unaffordable interest rates. Understanding your customers and their financial needs can help ensure you continue to sell cars to deserving shoppers, no matter how the market fluctuates.
North Americans are passionate about their automobiles. They love the freedom and independence that comes with owning a car and are willing to accumulate debt to purchase the vehicles they want.
But we’ve all witnessed volatility within various markets, and retail automotive is not immune. Dealers should be thinking hard about planning for the future, building lifelong relationships with their current customers, and building a brand that can withstand the test of time.
FlexDealer is a creative marketing agency for car dealers that breathes life into your dealership marketing. We give you access to best-in-class marketing and technology services that are personalized to your needs and goals. From inventory management and merchandising to vehicle advertising to organic content and beyond, we’re here to help your dealership thrive for the long haul. Contact us at any time to learn more!