What impact are rising interest rates having on motor finance?

Check the news and it’s hard to escape headlines about rising costs and the global economic challenges we all face. To combat these rising costs and stave off a recession, we have seen soaring interest rates which have had widely publicised impacts on consumer finance products, most notably mortgage rates.

With such products seeing the impact of base interest rate rises, there is concern about exactly how these rate rises are impacting motor finance and we are seeing a decline in consumers opting to buy through finance.

What are we seeing on Auto Trader?

The good news is that we are seeing strong consumer interaction with finance on our marketplace. We currently see an average of 1.9m finance interactions each month, that’s 45 every minute!

In fact, in October we saw finance interactions on our platform up 43% ahead of pre-pandemic levels, so we’re seeing more people use our calculators than ever before. Reassuringly, this correlates with the Finance and Leasing Association’s data which shows that used car finance penetration is now at a record high of 50%.

These interactions are converting for the 74% of retailers who are live with a finance calculator on our platform. Each month, retailers receive between 25,000 and 30,000 finance leads from our marketplace. Added to this, we also see that finance is the most discussed topic in online chat inquiries.

So, based on what we are seeing on our platform, demand for motor finance continues to be robust. Why then are we seeing demand for motor finance remain strong whilst demand for other products such as mortgages has slumped?

How is motor finance different?

The reason motor finance demand remains stable is largely due to motor finance propositions being very different from other finance products on the market.

Chief among the key differences is that motor finance is much less affected by base rate rises as consumers are in fixed PCP and HP contracts. it’s only when buying new/upgrading that a new rate might affect them, But, for example, a 1% increase on a 10k car is only £ 5 pm more vs the equivalent on a house being significantly more. Therefore, the impact of rises on consumers, retailers, and manufacturers is limited.

Interest rates are also fixed not variable throughout the contract duration, so, unlike mortgages, consumers have fixed outgoings until the end of the contract and are not hit by fluctuations in their interest rates through the finance period.

It’s also worth noting that motor finance rates are typically higher than those of other finance products, often 9 – 10% for used car finance, and so there is the ability to absorb APR rises in these.

Are motor finance rates on the rise?

Despite the ability to absorb APR rises, we have seen new car finance rates for both HP and PCP rise over the last 18 months, hitting an average of 7.7% in November.

Used rates have also seen a rise however this has been at a far slower pace than the rate rises we have seen on new car finance. This year we have seen average rates climb by around 0.1 percentage points per month and accelerating after the mini budget to 10.7% as of November.

It’s important to note that the above charts represent an average across lenders and that there are significant discrepancies in the rates offered between lenders. You can see this in the chart below which shows the rates offered by the top 10 lenders on our marketplace.

It’s crucial then to look at what rates are on offer when choosing finance partners.

Is consumer confidence still there?

As we’ve already seen, finance usage remains high, and interactions are growing with a 5.4% year-on-year increase in finance interactions and a 15.5% year-on-year growth in finance leads. Buyers then are confident in utilising finance to purchase their next vehicle.

More broadly our analysis of consumer’s confidence in their ability to afford their next car shows that confidence remains high, with no major variations in confidence over the last 11 weeks.

The meteoric rise in used car prices that we saw through the pandemic may also have given a boost to consumers confidence in buying their next car. Prices have risen by around 40% vs pre-pandemic levels and this means that most consumers who were on PCP finance prior to the pandemic have now found themselves in positive equity.

Will consumers continue to utilise motor finance?

Despite rising interest rates, the cost-of-living crisis has seen many consumers state that they are now more likely to buy through motor finance.

All indications then are that consumers will continue to utilise finance throughout the cost-of-living crisis with the following factors all ensuring that we will continue to see high finance penetration:

o   Over the past decade, consumers are increasingly comfortable buying their cars on finance

o   Many consumers have bought used car finance at rates 10% APR in a lower interest rate environment

o   Many consumers are in existing finance agreements and will have a decision to make at the end of their term

o   Equity positions have improved due to rising used car prices

o   Finance offers stability of outgoings over the next few years when other costs will rise

o   Higher used car prices make cash purchases harder