Will the economic climate cause a slow-down in demand for new car finance?

A backdrop of falling consumer confidence caused by current economic challenges including the energy crisis, cost-of living crisis, rising inflation and interest rates could result in a slowing demand for new cars and new car financing, which is ironic as supply in the auto market is slowly starting to ramp up following supply constraints caused by the pandemic.

Cox Automotive Chief Economist Jonathan Smoke said, “The irony for the auto market is that just as the industry is poised to start seeing volumes increase from supply-constrained recession-like low levels, the rapid movement in interest rates is reducing demand.”

The volume of consumer new car finance business fell 6% year-on-year in August in the UK following a 3% decrease in July 2022. New data from the Finance & Leasing Association (FLA) reveals another tough month for the new car finance market, while the consumer used car market had no such problems with the market reporting another month of growth.

Geraldine Kilkelly, Director of Research and Chief Economist at the FLA, said: “During the coming months when many consumers may be facing increased pressures on their household incomes, the motor finance industry remains committed to meeting demand for the financing of car purchases and providing targeted support to customers who may need it.”

It has been noted that the number of order cancellations is starting to rise with customers being allowed to cancel because of the long lead times. However, are consumers using this as an excuse and the real reason is the rising cost-of-living crisis?

Due to supply constraints, this year’s car market will be about 800,000 cars fewer than 2016, and is unlikely to recover until the end of 2023 or even 2024, so this will filter out people concerned about the cost of living without seeing a decline in demand for finance for the new cars that are available.

Despite the current economic climate, the number of defaults is still relatively low at present, but this is usual practice as there is always a lag between the fiscal event and customers defaulting. Defaults will gradually increase as we hit the winter months with the arrival of the first quarterly utility bills and increasing mortgage rates hitting those with variable rate mortgages and more customers having to refinance existing fixed rate deals.

Another problem will appear with the rising inflation on car prices, the decline in manufacturer discounts and rising interest rates resulting in new leases costing approximately 20-30% more than the leases coming to an end for the same car model. This means drivers will have to downsize to a cheaper car to keep their monthly payments the same, or face a significant increase in rentals.

The higher cost for car financing comes as household budgets are already being squeezed by decades-high inflation, meaning that consumers may no longer to be able to afford the new cars that are starting to arrive on dealer forecourts. And if interest rates keep climbing, so too will the cost of financing.

Darren Sinclair, CCO of iVendi believes that the reason for a higher rate of car finance rejections is “that the cost-of-living crisis and generally poor state of the economy mean that lenders are becoming less keen on approving individuals who do not meet their criteria exactly. This is understandable with a recession looming or already underway.”

Dealers will be increasingly worried about the long-term impact of rising finance costs on demand for new cars and, according to Sinclair, may need to look at their lender panels to ensure that they are offering a good spread of lenders with a wide range of risk appetites, while offering competitive rates for consumers.