The evolution of auto consumer finances in the wake of economic headwinds

Melinda Zabritski joins Inside Automotive to discuss the status of consumer finances and how buyers are dealing with economic headwinds

With a possible recession on the horizon for the U.S., it is more important than ever for dealers to understand the status of consumer finances. Melinda Zabritski is the Senior Director of Automotive Financial Solutions for Experian, and recently presented the credit analytics firm’s annual State of the Automotive Finance Market Report. To highlight the major takeaways from the report, Zabritski joins host Jim Fitzpatrick on this episode of Inside Automotive.

While fluctuations in vehicle values have started to normalize, overall car prices remain inflated, creating a hostile environment for consumer finances. In 2022, new and used car buyers were loaned an average of roughly $42,000 and $29,000 respectively, slightly down from 2021 but still uncomfortably high. Average monthly payments for new vehicles increased 13.3%, hitting a record-breaking $700 in the third quarter. Delinquency also rose, back to pre-COVID levels, while loan terms increased to all time highs of 69.7 months for new and 68.1 months for used. The number of leases has also dropped substantially since 2019, which Zabritski attributes to inventory constraints and a lack of incentives.

Although auto-related debt and monthly payments continue to climb, Zabritski notes that their rates of growth are finally starting to taper. While inventory is less than ideal, supply has become far more reliable, giving retailers more breathing room to host deals. Used car prices have also dropped in the wake of increased OEM output, giving budget-strapped shoppers a friendlier alternative. Unfortunately, much of these recoveries have yet to be felt by in terms of consumer finances, since interest rate increases are driving up monthly payments. As the Federal Reserve continues its war against inflation, more hikes are guaranteed, which means that manufacturers and dealers may need to confront the unenviable scenario of high supply and low demand later in the year.

However, while the market’s performance is far from healthy, retailers should avoid panicking. Despite heavy financial burdens, American consumers have managed to budget accordingly, as evidenced by the nation’s average credit scores. Even as debt increased year-over-year, the average credit rating remained at 716, with substantial growth in the 700 plus range. Furthermore, although average auto loan terms grew, the number of 48 month terms increased, suggesting strong incomes and money management skills. While the threat of a recession still lingers, the kinds of behaviors that caused a financial crisis in 2008 are largely absent, dulling the effect of a possible shrinkage. Although Zabritski notes that the U.S. is to struggle with COVID-related challenges for the foreseeable future, dealers should also take comfort in the resilience of modern consumer finances.