The Federal Reserve's interest-rate increase last week and its new long-term course toward further tightening probably won't slow consumer demand for new and used vehicles.
But they will mean a more competitive environment and possibly slimmer profits for dealers, lenders and automakers as they absorb higher financing costs. And in the financing battle, captive lenders may gain an additional advantage over banks.
The central bank last week raised its benchmark rate to a target range of 0.25 to 0.5 percent, ending a seven-year period when it held rates near zero to help the U.S. economy out of the financial crisis. The bank also indicated it is likely to push rates higher, in small increments, by one percentage point in 2016, and would probably do the same in 2017 and 2018.
"Money has been dirt cheap for so long, it's become the norm," said Adam Silverleib, vice president of Silko Honda in Raynham, Mass. "Now we're just headed back to reality. I don't see it being a disaster as long as the economy holds up."
AutoNation Inc. CEO Mike Jackson echoed that view. "The auto industry does not need a free lunch on interest rates," he said. "Auto sales in 2016 will be above 17 million, even with higher interest rates."
But higher rates are likely to force automakers and their captive finance arms to dial up incentives to avoid passing higher costs on to consumers.
Consulting firm AlixPartners estimated that a one-point rise in average auto-loan rates from 3 to 4 percent would reduce a consumer's purchasing power by $1,000. Mark Wakefield, director of AlixPartners' automotive practice in the Americas, said most of that probably will have to be offset by higher incentives.
Because the U.S. auto market is likely to grow very little next year, and may contract slightly in 2017, it's "likely that the [manufacturer] is going to have to put in more incentives to keep people buying and to give them the car they want with the payment they want," he said.
That could play into the hands of captive lenders, who can count on support from their affiliated carmakers, said Melinda Zabrit-ski, senior director of auto finance at Experian Automotive. "Subvented financing is the advantage of the captive [because] they don't have to be the profit center," as a bank would, she said.
Subvented loans and lease support by manufacturers have been key drivers of the U.S. auto industry's climb this year to record or near-record sales. According to Edmunds.com, 0 percent loan deals made up 9.9 percent of new-vehicle sales in the first 11 months of 2015, up from 8.7 percent in 2014.
For dealers, the main concern is likely to come in financing their inventory or store improvements. Once the Fed moves base rates one or two percentage points higher, many retailers are likely to feel an impact on their floorplanning costs.
"Of course floorplanning is a concern," Silverleib said. "If your costs go up, it has an impact on the inventory you're willing to carry."
For dealers, that could mean stocking fewer cars and trucks, or working harder to stock those that move the fastest, and shying away from specialty models or trim levels that might sit on the lot longer.
But overall, higher rates should be manageable in the current environment. Automakers have moved away from many bad practices of the past -- jamming dealers with inventory, overproducing vehicles and offering profit-eating incentives. And while other key auto markets are struggling economically, the U.S. continues to experience economic growth, an improving housing sector, a strong stock market, low gasoline prices and lower unemployment.
"I keep reminding folks that the Fed, if and when they raise rates, it's a sign of a healthy economy," said Ford CEO Mark Fields in a Dec. 11 interview, noting that the economy still had room to grow. "With housing starts and new-home sales that are still below prerecession levels, I think that bodes well for the industry going forward."
Nick Bunkley and Hannah Lutz contributed to this report.