I was back at the dealership — less than four months since the vehicle service contract (VSC) I purchased covered my suspension issue. This time, I needed the service department to figure out why my Subaru Forester was hesitating during acceleration. Turns out my engine control module required an update. While that didn’t cost me, something else my technician discovered did. Luckily, I was covered.
Before I go on, I want to give a shoutout to reader Skip Jones. You were right. Informing my service advisor of the VSC I purchased from the get-go did make for a smoother service experience. The tone of our interaction changed, and a problem I wasn’t aware of was uncovered.
"By the way, two more rate increases are expected this year. I know rising rates play right into your product pitch, allowing you to play up the importance of the budget management and savings F&I products provide. But as Cox Automotive also said in June, “Rising interest rates impact all corners of the business."
Well, my service tech found two leaks, one of which required that my oil pan gasket be replaced. Online estimates put that repair at $400. I’m guessing the estimate for the second repair is about the same. And to think an industry contact of mine recommended against purchasing the VSC on my Forester. “It’s bulletproof,” he said. Turns out, it’s not.
Last year, AAA reported that 64 million drivers were not able to pay out of pocket for an average repair bill of $500 to $600. I bring this up because I’ve come across several reports that warn of several market factors bubbling below the surface that could hamper your showroom’s ability to sell and car buyers’ ability to buy.
Let’s start with Experian Automotive, which reported in late May that the average amount financed for a new vehicle in the first quarter rose $921 from the year-ago quarter to a record $31,455. The average monthly payment for a new vehicle also reached a new high, rising $15 from the prior-year period to a record $523. The firm also reported that the average interest rate for a new vehicle jumped 31 basis points from the year-ago period to 5.17% in the first quarter.
This past June, the Fed raised the Federal Funds Rate a quarter percentage point — the second increase this year and the seventh since 2015. Keep in mind that average rates on automotive loans, according to Cox Automotive, were already nearing seven-year highs before the recent rate hike.
Toss in rising average transaction prices — which peaked this past December at $36,111, according to Kelley Blue Book — and average payments are up more than 4% from last year, Cox reported in June.
By the way, two more rate increases are expected this year. I know rising rates play right into your product pitch, allowing you to play up the importance of the budget management and savings F&I products provide. But as Cox Automotive also said in June, “Rising interest rates impact all corners of the business.”
For vehicle OEMs, rising rates increase the cost of providing low-interest rate loans. For a $35,000 vehicle, Cox noted, providing zero percent financing for 60 months at 2.9% vs. 3.9% is a difference of more than $900. That might explain why Edmunds discovered that zero percent interest rate loans fell to their lowest level in nine years in June, which typically boasts a substantial amount of zero percent financing offers.
For dealers, rising rates increase the cost of acquiring and maintaining inventory, “which shaves a little deeper into already tight profit margins.” Even operating costs for vehicle suppliers, who often borrow to finance vehicle program fulfillment, are expected to rise.
And consider this: Despite first-half retail sales being the weakest in four years, LMC Automotive and J.D. Power reported that consumers spent nearly $5 billion more on new vehicles than they did in the first half of 2017. Yes, demand for trucks is partly to blame, but still.
And let’s not forget this bubbling trade war, which LMC Automotive said poses the biggest threat to its 2018 forecast of 17.1 million total light vehicles sales and 13.8 million retail sales. In fact, the Center of Automotive Research said imposing a 25% tariff on auto imports would raise the price of a typical new car sold in the United States by $4,400, while the National Automobile Dealers Association estimated that tariffs would push the average new-car payment to $611 a month.
To make matters worse, Edmunds reported in late June that the number of buyers who owe more than their vehicle is worth is at historically high levels. Add that to record-high vehicle prices, a virtually saturated market, and rising interest rates, and “the stage is set for a market contraction,” the firm said.
Quotes like that make me glad I also opted for the appearance package. In fact, I got a guy coming this month to take care of my first claim.