2016 is now in our rearview mirror. For many of us, that is a relief. The election created debate, anger, frustration, exhilaration and — depending on whom you supported — either hope or despair.
However, unless you are an automotive manufacturer who committed billions to building a plant in Mexico and now face the possibility of import taxes or a U.S. worker in an automotive manufacturing plant, Trump’s victory is significantly less important than several other factors that will affect the automotive industry, retail and aftermarket sales in 2017 and beyond.
Factors at Play
To see the future, it’s sometimes best to look to the past. In 2009, after the economic crisis, I was on a panel at Industry Summit. My fellow panel members were indicating that the “new post-Recession economy” would significantly change car buying and automotive retail opportunities.
I was a contrarian on that panel. I said that nothing would change because human needs don’t change, regardless of the economy. Similarly, in 2017, regardless of who is president and which party controls Congress, car buyers will have the same basic needs: to be treated fairly and respectfully, to have transparent and fast transactions, and to have affordable payments on vehicles and protection products.
More important factors affecting automotive sales in 2017 will be rising interest rates, rising vehicle prices and longer loan terms. As interest rates rise, lenders and dealers will be tempted to continue to extend loan terms to allow for lower and more affordable payments.
Longer loan terms mean more negative equity in the market — and we already have a growing problem with negative equity in the market. In 2009, only 13.9% of owners were upside down in their vehicles. In 2016, according to Edmunds, 32% of all vehicles offered for trade-in at U.S. dealerships were upside down. The average amount of negative equity on those vehicles also rose to a record high of $4,832.
An Uncertain Future
As interest rates rise and negative equity in the market continues to grow, car buyers will face greater challenges in achieving affordable payments that fit their budgets. These factors will put additional pressure on vehicle sales.
Longer loan terms and rising vehicle prices are already exacerbating the negative equity problem in the market. According to Experian Automotive, the average new car loan currently is 68 months. The average car loan for buyers with FICO scores in the low 600s or worse is 72 months. Adding pressure to the problem of negative equity and affordability, the average selling price of a new vehicle is near a historic high of almost $34,000. The average new auto loan was almost $30,000 in the second quarter of 2016, according to Experian Automotive. That’s 4.8% higher than in 2015.
The upward pressures of rising interest rates, increasing vehicle prices and longer loan terms that generate negative equity will have a significantly greater impact on vehicle sales and our industry than Trump’s presidency and Republican control of Congress. We must be looking for ways to help customers achieve more affordable payments while reducing loan terms to correct the current trends which will lead to greater challenges to automotive and aftermarket product sales in 2017 and beyond.