F&I managers, take note: High rates are probably here to stay, regardless of what the Fed does this year.
Rising interest rates have changed the financing landscape in recent years, adding fuel to the fire of climbing transaction prices. But even if the Federal Reserve reverses the benchmark interest rate, the pullback is unlikely to help customers facing an affordability crunch.
When determining how the benchmark interest rate affects rates for certain loan types, the best bellwethers are bond yields, according to Jonathan Smoke, chief economist at Cox Automotive. Since the Fed reversed course on hiking interest rates another two notches this year, bond yields came down more than a full percentage point. In turn, mortgage rates dropped 70 basis points, he said.
But in automotive? Analysts say consumers aren't catching a break.
Jeremy Acevedo, Edmunds' manager of industry analysis, doesn't expect the average auto loan rate to decrease more than half a percentage point in the coming months.
"I don't think it will really move the needle all that much. I definitely don't think it will be something people will be relying on," he said.
A tapering benchmark rate could only benefit the industry if it allows lenders to offer more 0 percent financing deals, added Acevedo, which had been a summer sales trademark in the years following the Great Recession.
Auto loan rates are within 10 basis points of where they were October, Smoke said, and depending on a customer's credit score or the vehicle they want to finance, those rates are "either unchanged or higher."
The reason rates aren't improving for car buyers has more to do with auto lenders than the financial markets, Smoke said. Lenders, or the investors behind them, could be losing their appetite for auto loans after taking on more subprime borrowers than they had in previous years. After all, subprime borrowers contributed the most auto loan origination growth among the credit tiers in the first quarter, according to the Federal Reserve Bank of New York, with originations up 13 percent to $27.9 billion.
That means auto lenders are asking for more financial incentive to add automotive loans and leases to their portfolios.
F&I managers shouldn't look to the Fed for a relief in interest rates. Instead, they'd be wise to focus on nurturing relationships with lenders and negotiating with those lenders on behalf of their customers.