Rising Credit Costs, Transaction Prices Slamming Auto Affordability, EV Adoption

Monthly auto loan payments are at historic highs, transaction prices continue to climb and sticker prices are losing their relevance as car shoppers’ wallets are being walloped by the effects of the Covid-19 pandemic including thin inventories, rising inflation and interest rates. Those conditions are dampening overall auto sales, but especially adoption of electric vehicles.

It’s not all bad news. Trade-ins are fetching lucrative payouts from dealers desperate for anything to sell, especially in-demand late model pickup trucks and SUVs.

On the credit side, consumer load shows no sign of retreat. According to the Q1 2022 TransUnion
TRU
Credit Industry Insights Report released last week the average balance of new auto loans reached $28,415 in the first quarter of this year. That’s a year-over-year increase of 15.2%. “This has pushed the average monthly payment of vehicle purchases (including both new and used vehicles) to $458, an increase of approximately $100 over a four year period,” the report stated.

“We certainly see this trend of increasing average monthly payments. In the first quarter of 2022 that number got up to $556 on average,” Satyan Merchant, senior vice president and automotive business leader at TransUnion told Forbes.com. “For new vehicle financing the average was $651. Used, $490. Both all time highs.”

Ironically, annual percentage rates (APR) on auto loans are actually in retreat according to Merchant who noted they’ve plateaued with an average of 4% for a new car loan and 8% for used car financing which are both lower than APRs in 2018 and 2019. The payments, however, are being bloated by consumers’ preferences for pricey pickups and SUVs, Merchant said.

He expects APRs may head north again after the Federal Reserve hiked interest rates by a half point to help slow inflation.

Consumers’ rich tastes combined with their willingness to pay whatever it takes to land the vehicle of choice has led to a break with buyers traditionally bargaining to pay below sticker price.

“For nearly a year now, we’ve seen new vehicles transacting above suggested retail prices,” said Rebecca Rydzewski, research manager of economic and industry insights for Cox Automotive in a recent report. “High prices, a lack of inventory, few incentives – the market is changing, pushing many would-be buyers to the sidelines and forcing others to order from future stock and wait. We expect new-vehicle affordability will be a challenge for the foreseeable future.”

Indeed, according to Cox Automotive’s Kelly Blue Book unit, average transaction prices clocked in at $46,526 in April, as “car shoppers paid on average $862 above sticker price.”

Just as automakers are producing electric vehicles in a wider variety of body styles creating increased consumer interest, those on a budget may have to hang onto their gas-burning rides a little longer.

“The issue here is one of supply and demand and the fact these cars cost more to produce, mostly because of cost of the batteries,” said Jesse Toprak, chief analyst at EV subscription provider Autonomy. “Long term outlook is prices will decline and premiums will start to erode but that will take several years.”

For those anxious to at least try moving to an EV Autonomy offers subscriptions to a Tesla
TSLA
Model 3. After a three-month minimum, subscriptions are month-to-month. Customers have a choice of two payment plans— either $4,900 down and $490 a month, or $990 down and monthly payments of $990.

Toprak says it’s a good plan for those not sure they’re ready to make the switch, calling an EV subscription “an extended test drive.”

But he’s confident resistance to EV adoption, especially by those who drive work vehicles, by the introduction of the Ford F-150 Lightning electric pickup truck, going so far as to call it “the most significant introduction of a vehicle since the Model T.”

His rationale? Appealing to the working class customer will open a massive new market willing to pay the EV premium, if, “we can bring that segment into the EV fold and they start to see this thing is amazing, don’t have to spend $800 a month in gas, but also my torque is better, my performance is better.”

Right now Autonomy is operating only in California but Toprak says the company is expanding its service area and plans to broaden its EV offerings as well.

The bit of good news for consumers facing rising prices and the costs of credit is the car or truck you want to trade may be worth a treasure.

According to report out this week from online auto marketplace Cars.com, dealers with too many empty spaces in their lots are paying premiums for cars and trucks to fill them.

“An overwhelming 99% of surveyed dealers said they are paying more for trade-ins now than two years ago; almost 60% estimate an increased payout between 11% and 20%, and more than one in three dealers report paying over 20% more than two years ago,” the Cars.com survey found.

That extra cash may just provide enough scratch to swing a new set of wheels—maybe even one that runs on batteries.