Article by Paul Michaud
Chief Operating Officer, Insurance Trust
Consumers looking to purchase a new or used vehicle this year may not see the auto rates drop as drastically as the previous year, but rock bottom interest rates will soon be here. The National average rate for a 60-month term for a new auto loan started 2021 at 4.24% and dropped slightly to 4.18% halfway through the year (Bankrate Data). Correspondingly, 36-month used vehicle loans began at 4.53% and decreased slightly to 4.49%. Helping with this low-rate environment is the Federal Reserve, which is making it a point to keep rates consumer-friendly for the remainder of the year and even looking through 2022. Greg McBride, Chief Financial Analyst at Bankrate, says, “amid the recovering economy, the Federal Reserve is still going to keep the interest rates low and new car loan rates are currently the lowest since early 2015.”
The problem for car buyers this year is not the interest rates, but the lack of inventory that we are seeing at our dealerships across the country. The current global chip shortage has tremendously impacted the supply availability of new cars in North America. North American inventory at the end of May 2021 was roughly 1.5 million vehicles compared to 2.6 million at the end of May 2020 (National Automobile Dealers Association). This is projected to drop to as low as 1.3 million vehicles by the end of August. Thus, creating a further problem with high consumer demand for low inventory.
Challenges with new car inventory are only making prices higher for the consumers, therefore placing an even larger emphasis on ancillary protection than ever before. The estimated average transaction price for a new light vehicle in the United States reached $41,263 in May 2021; this is a steep 5.4% increase from the same time last year and up 1.2% from April 2021 (Kelley Blue Book).
Historically it has always been true that by buying a used car a borrower can save money and depreciation. Used vehicle prices typically tend to be much more affordable, but with the lack of new vehicles, we have seen this number drastically increased. At the end of the second quarter of 2021, the average used vehicle price is up to $25,410, from $20,842.00 (JD Power).
What are the next steps for borrowers? With manufacturing and chip shortages caused by COVID-19 related shutdowns, we will continue to see an impact on both new and used car prices. Consumers willing to be patient and wait out the challenges may be able to acquire better deals on car purchases. If you are a consumer who is intent on purchasing a vehicle now, plan to expand your monthly budget and pay about 12.7% over the MSRP or sticker price; this is an increase of 3.8% year over year (JD Power).
As one can see, with a challenging rate environment and auto market, it is imperative that financial institutions are maximizing ancillary protection benefits and providing online auto lending platforms as more consumers are buying vehicles across state lines. Over 90% of consumers are starting their car buying experience online which is up 55% from only a few years ago. This spring, Insurance Trust launched an online auto buying concierge service to help credit unions answer the call for a member online auto buying experience. As the market changes so do consumer habits and spending.
If you would like any more information on the auto market or Insurance Trust solutions for your credit union, please contact Chief Operating Officer, Paul Michaud. email@example.com | 207-333-7093