As monthly payments, loan terms and amount financed increases for new and used vehicles purchased during the coronavirus pandemic, one influential metric continues to drop — the average interest rate.
Rather than a positive omen for affordability in the new-vehicle market, experts at Cox Automotive believe the drop indicates an increasing exclusivity in obtaining vehicle financing.
The number of customers buying new vehicles with high-interest-rate financing dropped, Charlie Chesbrough, Cox Automotive senior economist, said last week in a virtual media presentation. These buyers likely were priced out of the market, he said.
“We’ve probably seen a huge exodus of customers from the new-vehicle market — the people that would pay the higher interest rate, the hourly workers,” Chesbrough said.
The trend reflects what credit bureaus Experian and TransUnion reported throughout the pandemic — that auto customers in the lower credit tiers are disappearing from the new-car market.
In the first three months of 2020, the average interest rate on new-vehicle financing contracts Cox recorded through its Dealertrack software was 6.1 percent. In April, that figure dropped to 4.7 and remained below 5 percent the rest of the year, closing in December at 4.3 percent.
The percentage of consumers who obtained financing at rates lower than 4 percent jumped 15 percent in April, Chesbrough noted, and remained at high levels throughout the year.
While the trend is negative, the shift in consumer activity signals the areas dealerships should focus on in the second half of 2021. With the eventual dissemination of the coronavirus vaccine and the stabilization of the U.S. economy, buyers in these credit tiers will return to dealerships.