Rate Increases Unlikely to Hurt Auto Loans, Short Term

canstockphoto0854977Higher interest rates are unlikely to hurt auto lenders much in the short term, for a couple of reasons, lenders said.

First, rate increases look to be gradual once the Federal Reserve starts to normalize monetary policy, possibly later this year.

“The consumer is not even going to notice it,” said Paul Kirkbride, senior vice president of credit union solutions at CU Direct Corp.

Second, some lenders – especially credit unions that pay dealerships flat fees – would probably see their margins go up if rates increased, without a corresponding increase in dealer compensation, he said.

Finally, consumer demand is so strong, said Joe Pendergast, assistant vice president of consumer lending at Navy Federal Credit Union. “There’s a very high demand for cars and trucks, and consumers are purchasing vehicles out of necessity, because the average age of a car on the road today is over 11 years old,” he said.

New-auto sales are expected to exceed 17 million units this year, the highest volume since before the recession, he said.

Returning from CU Direct’s annual lending conference in Las Vegas last week, Kirkbride said many credit unions have already started to raise rates and have seen “almost no drop-off in volume whatsoever.”

“Auto buyers are not rate-sensitive, they are payment-sensitive,” he said.

For instance, if rates were to rise 25 basis points, which many analysts expect later this year, the monthly payment on a four-year, $22,000 auto loan at 3% would increase by just $1.67 at 3.25%, he said. Even if the rate doubled to 6%, that’s still only about $20 per month, he said.

Kirkbride said, “That is beyond immaterial and [won’t affect] affordability.”

Last Friday Fed Chair Janet Yellen said it “will be appropriate at some point this year to take the initial step to raise the federal funds rate,” from its current level of 0%, with the first increase likely to be no more than 25 basis points, according to Wall Street economists and analysts. She added that subsequent rate increases are “likely to be gradual.”

 

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