How Do New Car Prices Affect Subprime Affordability?
Eyo Toe | May 3, 2021
Last week Black Book reported yet another increase in their Weekly Wholesale Index up 1.60% from the previous week. Increased demand from consumers and low supply continue to be a challenge as wholesale prices rise and the new car supply continues its ongoing shortage.
In addition, Auto Finance News reported that Huntington Auto Finance experienced a 20% decline in floorplan assets during Q1 of 2021. With their portfolio consisting of mostly franchise floor plans, this gives insight to the domino effect of the lack of new car supply transitioning to used car supply for BHPH and LHPH dealers.
Analysts in the WSJ are predicting that the supply and demand will not balance out until the second half of 2022. What does this mean for dealers in the used car industry? Dealers will need to realize the most value out of their assets and find innovative ways to meet their customers’ needs. Subprime customers will be the most impacted consumer group as many require transportation for work and are not able to pay a higher car payment if prices continue to rise over the foreseeable future.
Affordability is a benefit for not only lease-here-pay-here dealers but for their consumers as well. In pay-as-you-go states, dealers are able to keep the entire down payment rather than pay sales tax on the full sales price upfront, allowing them to reinvest that money into additional cars or reconditioning. Those vehicles can also be leased two to three full-term leases before cashing it in for its residual value.
Leasing can also take the burden of increased car prices off of your customer when they lease a vehicle. Because many of the lease variables are adjustable and includes a residual, the customer payment can stay at an affordable level as the uncertainty of 2021-2022 car prices continue.