Consumers will be able to afford vehicles in 2022 despite rising prices, and their demand means auto dealerships will have a strong year, the finance-and-insurance products provider EFG Companies predicted last month.
"The retail automotive industry has seen firsthand just how financially prepared the average consumer is right now," EFG Chief Revenue Officer Eric Fifield said in a statement Dec. 7. "Between securing record trade-in amounts for their current vehicles and government stimulus checks from the previous year, demand for vehicles is not only high, but more consumers have more cash to put down on their next purchase."
With supply constraints continuing into this year, Fifield said EFG is advising clients to focus on strategic planning, implement a realistic approach to pricing and emphasize customer engagement and implementation of value-added products and services to increase market share in the coming months.
EFG CEO John Pappanastos also mentioned customers' strong financial position during a Nov. 20 discussion of GAP exposure on used vehicles.
EFG found that while vehicle prices had soared, "the amount being financed isn't up materially," Pappanastos told Automotive News. He said 18 percent fewer transactions involve negative equity when customers seek to roll an existing vehicle into a new purchase.
"They're getting more for their trades," Pappanastos said. "They're not actually borrowing more money."
Loan-to-value ratios are dropping, while loan terms have risen, according to Pappanastos. Favorable wealth, savings, refinancing and work-from-home trends allowed vehicle buyers to manage higher monthly payments, he said.
Soon after his Nov. 20 comments, Experian reported customers financed an average of $26,230 on used vehicles during the third quarter, up from $21,622 the previous year. The average monthly payment rose $70 year over year, while the average loan term rose by nearly two months to 66.97 months. However, the average interest rate dropped from 8.39 percent to 8.12 percent, and the average loan-to-value ratio dropped from 124.21 percent to 110.76 percent.
EFG anticipated about 4 million vehicles worth of pent-up demand existed entering 2022, which favored the auto retail market, Pappanastos said.
"We think there's really bright skies ahead for automotive," he said.
Pappanastos said franchise dealerships would have an edge over independents because of access to floorplan credit and access to trade-ins.
"Driven by constrained consumer spending at the peak of the 2020 pandemic, the economy has demonstrated a 'rubber band' effect," Pappanastos said in a statement Dec. 7. "After a significant pullback, the economy sprang forward in 2021 with such velocity that demand for goods overwhelmed global supply chains. Businesses also have struggled to ramp up in the face of several stops and starts, labor concerns and changing consumer demand. Despite these issues, we believe the forecast for the overall 2022 automotive retailing space is strong with numerous opportunities for revenue generation."
Pappanastos said EFG encouraged dealerships to keep an eye on new-car inventory turns and automaker incentives for a sense of when the market would cool. But the increased volume of new vehicles would come to market with higher sticker prices than before, keeping used-vehicle prices high, he said. Dealerships should expect a "fairly gradual decline" in used-vehicle values, not a collapse.
"Pent-up demand for new vehicles is expected to continue to build," EFG dealer services Executive Vice President Scott Kaskocsak said in a Dec. 7 statement. "As a result, OEMs have reduced incentives by 45 percent over the past year. Strong consumer financial positions and favorable credit terms spell revenue opportunities for those dealers who know how to manage purchasing. This means selling into their pipeline of inventory, rather than just what's on the showroom floor.
"As the global supply chain woes begin to unwind, consumer willingness to pre-order units with flexible financing can mean the difference between a sale or a miss."
