Affordability. It's one of the biggest F&I buzzwords of the past few years. But as interest rates and monthly payments continue to rise, affordability will likely come under threat.
With a flat delinquency rate and wide credit access, the auto finance space looks pretty rosy. But let's not forget — even a $40 spike in monthly payments can be a strain for many consumers.
"We need to keep in mind as an industry that Americans are not wealthy," said Charlie Chesbrough, senior economist for Cox Automotive.
More consumers will likely continue to choose a used-vehicle loan over a lease to keep costs down. A few years ago, a lease payment may have only been $25 more than a used-vehicle loan payment, said Chesbrough. Today, the gap is closer to $75, more than double the difference in 2014. That makes used-vehicle financing more attractive and leasing a tougher sell.
The average household income in 2016 was $57,617, according to U.S. Census Bureau, so that extra $40 per month could be hard to come by.
According to Edmunds, the average monthly payment for used vehicles in July was $398, up 4 percent from a year earlier and 9 percent higher than in 2013.
"The fact that interest rates are going up is already going to squeeze out some of the subprime folks that just aren't going to be able to afford that monthly payment," Chesbrough said.
With a flat default rate of 1.2 percent in the second quarter, according to TransUnion, most consumers are paying their auto loans.
But as monthly payments increase and interest rates climb, affordability may be in danger for many consumers.