New car buyers feel the pinch as interest rates rise and incentives dip

Wrong side of 10%

Even with the recent moderation, J.D. Power says incentive spending is above healthy levels.

Incentives that are more than 10 percent of vehicle sticker price are problematic, said Jonathan Banks, J.D. Power vice president of vehicle valuations and analytics. On the car side year to date, the average incentive per vehicle represents 12 percent of the sticker price industrywide, according to J.D. Power data. For premium cars, it’s even worse, representing 14 percent of sticker. For light trucks, the metric is at 9.7 percent of sticker.

While automakers could keep spending to retain customers, Banks says, that’s not sustainable.

“We all saw what happened when manufacturers just try to give money away to sell vehicles,” Banks said. “They go bankrupt.”

Automaker quandary

So what are automakers to do?

Mark LaNeve, Ford Motor Co. vice president of U.S. marketing, sales and service, said this month that Ford is using data for more targeted incentive delivery. While Ford has offered 0 percent financing on a variety of vehicles for most of 2018, with rising interest rates, it’s “just more expensive to do so now,” LaNeve said.

Nissan, which has a tradition of offering some of the industry’s most price-competitive models, is closely watching for signs of consumers grappling with affordability.

“Transaction prices are up,” Billy Hayes, Nissan Division vice president for regional operations, told Automotive News. “Payments are up. Customers are paying more for technology.”

Sticker prices have risen as expensive lightweighting techniques and tariffs on steel and aluminum have increased the cost of materials and automakers have pushed more technology into vehicles. Industrywide, the average transaction price for a new light vehicle rose 2.3 percent in September to $33,436, according to ALG.

For Ehrichman, 65, the sticker shock on that replacement Genesis lease prompted him to take a look at other brands he had considered before settling on his Genesis. But he found similar increases. A Lexus ES 350, which would have cost $410 per month in 2016, now was $589, he said. A friend who’d leased a Mercedes-Benz C class a year ago at $430 per month, including tire-and-wheel protection, referred him to the same dealership — it couldn’t come close to the same deal. Ehrichman eventually ponied up to lease a Mercedes.

Upside down

Rising interest rates have changed the financing landscape in recent years. When the U.S. industry hit record sales in 2016, the Federal Reserve benchmark interest rate was between 0.5 and 0.75 percent. Now, it’s between 2 and 2.25 percent and expected to rise.

If the rate moves to a range of 2.75 to 3 percent, by next September, consumers will pay $6,117 on average in interest alone to finance a vehicle, according to Edmunds.

Tighter credit standards and the higher rates mean fewer customers are getting financing when they come back to the dealership owing more on a loan than their vehicle is worth, said Ivan Drury, Edmunds senior manager of industry analysis.

Luis Rodriguez of Oklahoma City is a case in point. In March 2015, Rodriguez bought a 2016 Chevrolet Malibu LT after relocating from Puerto Rico. His credit score was relatively low after a divorce, and he was offered a 12 percent interest rate. But the vehicle’s appeal was that it could be purchased with no money down.

By May this year, with his credit score much improved, Rodriguez, 51, toyed with the idea of getting a better deal — possibly a truck, which would help with his job as an engineer. The Malibu’s value was now $8,500, he said. But Rodriguez still owed more than $15,300, and lenders denied his application for credit.

“I would have preferred having something new at this time. I decided to just get a pair of new tires,” Rodriguez said. “I’ll be using it for a while.”

Overall, the amount of equity consumers have in their trade-ins is declining. According to J.D. Power, average trade-in equity in 2013 was $3,365 for all ages of vehicles. So far in 2018, that equity has dropped 35 percent to an average of $2,171.

In August, 31 percent of trade-ins had negative equity — the lowest share recorded this year. The average negative-equity level also unexpectedly dipped to $4,938, the first time it’s been below $5,000 all year, according to Edmunds. On the surface, the shift seems like a positive. But while some customers may be coming in to buy with lower negative-equity levels on their current vehicle, Drury says another likely factor is that some people like Rodriguez have so much negative equity they are not getting approved for loans and thus are forced out of the market.

“From a sales perspective, it hurts,” Drury said.

“You want to sell a car, and they want another car,” Drury said. “But the financing element is just not there.”

While additional incentives could help pull those customers back to the market, automakers are moving in the other direction.

At Nissan, pricing discounts have helped the brand chalk up U.S. market share gains the last few years. But the automaker is attempting to shift away from aggressive rebating in favor of more profitable retail growth for higher-priced models such as the Maxima and Murano. The Murano rose 18 percent last month to set a September sales record.

High-end Kicks

In the summer, Nissan made a new play for budget-conscious buyers when it introduced its Kicks subcompact crossover. Nissan has had thunderous success with its Rogue compact crossover. While the brand introduced the smaller Kicks with a starting price of $19,035, including shipping, demand so far has been overwhelmingly for the crossover’s most expensive packages, Hayes says.

“We’re selling more of the high-end SR trim,” he said. “The premium package comes with Bose headrests. Those are flying.”

It’s not yet clear how many Kicks buyers are moving down from the more expensive Rogue to save money.

Nissan has a cautious eye on what might come next. In the coming weeks, the brand will launch a redesigned Altima sedan, followed over the next year by a redesigned Sentra and Versa. Executives say they are bullish about the potential for the cars in the face of widespread consumer abandonment of the sedan segment. One reason: the affordability issue. The important strategy for Nissan, Hayes says, is to “offer something for everyone.”

Lindsay Chappell, Hannah Lutz and David Muller contributed to this report.