Expert Insights: The Implications of Rising Interest Rates

For the first time in more than two decades, consumers, dealerships and OEMs are contending with record-high interest rates. And this latest drag on the economy comes on top of other challenges facing the auto industry, such as low vehicle inventories and supply-chain disruptions. This unusual combination of events presents uncharted territory for all involved. So for some guidance in navigating this new landscape, Automotive News Canada spoke with Andy Wadeson, Vice President of Sales and Distribution for TD Auto Finance (TDAF). His overarching message: Yes, challenges do exist – but so do opportunities.

Q: Traditionally, rising interest rates hurt auto sales. But given the persistent inventory shortages and continued strong demand, should we expect that to be the case in this current period of high rates?
 

Andy Wadeson: We anticipate another challenging year in the Canadian automotive industry, but there is a light at the end of the tunnel. New inventory supply continues to be the biggest factor, as the sector continues to feel the squeeze from ongoing supply-chain disruptions.

The combination of limited supply, higher interest rates and eroding purchasing power for consumers due to inflation, likely leads to a best-case scenario of new sales recouping to trend (1.9 million units) over the coming years. As supply-chain issues continue to ease, we expect a further rebalancing in market supply, putting some downward pressure on prices. While this will certainly be a positive development from an affordability standpoint, we’re unlikely to see much reprieve from lower interest rates.

We anticipate 2023 to mirror 2022 in total vehicle sales, as new-vehicle inventory returning to dealership lots is tempered by higher costs for Canadian vehicle buyers.

Q: Are we about to enter a period where incentives become necessary? If so, what kinds of incentives? Zero interest loans? Longer loan terms? Cash-back incentives?
 

Wadeson: As it stands, buyers are contending with a whole host of factors: Higher gasoline prices, rising maintenance and insurance costs, and increasing vehicle prices and financing costs, all of which have led to a significant erosion of affordability.

There is little reason to believe that consumers won’t tighten their wallets as rising interest rates require households to dedicate more of their income to servicing elevated debt and expenses. The decision of each purchase in 2023 will weigh more heavily on customers, and they will be looking for more cost- effective deals on specific makes and models to fit shrinking budgets. In short, these customers will be looking for the most value for their purchase prior to committing and will be looking for any additional incentives to help make their purchasing decision easier.

On the other hand, OEMs are facing higher costs and expenses resulting from increased production costs. They’re also undergoing massive operational transformations, such as new delivery models and the conversion to electric vehicles. These factors may limit the ability to provide deep incentives in 2023.

Q: If consumers can’t buy a new or used vehicle, then the natural alternative is to maintain their current one. How can dealers leverage this increasing potential business for their service and parts department?
 

Wadeson: TD Auto Finance is Canada’s only full-spectrum lender, providing products and services for customers across the entire credit spectrum. I would encourage dealers to connect to their Dealer Relationship Manager to understand what financing products are available for their customers, prior to moving on from a sales opportunity.

Q: How will high interest rates affect the types of vehicles consumers purchase? Will they be attracted to lower sticker prices and fewer options?
 

Wadeson: Customers will seek value for their purchases, given the higher cost of the vehicles themselves. Historically, customers are not willing to go backward on vehicle trims and options. They’d rather wait than purchase less. As supply-chain issues continue to ease, we expect to see some rebalancing in market supply. This, in turn, should help exert a bit of downward pressure on prices. As the prices decrease and value for purchases rise, we can expect customers to return to previous buying habits and not focus as heavily on lower sticker prices.

Q: The COVID-19 pandemic taught the industry a number of lessons about operations, such as the advantages of an all-digital vehicle purchase. What lessons could dealers apply to cope during an era of high interest rates?
 

Wadeson: I think the biggest implication from the pandemic will be the use of technology that dealers carry forward in their business functions. They’re leveraging enhanced technology and lessons learned to augment their sales process and drive down operational expenses. A larger portion of their sales are in a digital environment that is now more widely accepted after the pandemic. This creates new ways to reach customers and significantly broadens their scope of customer possibilities. Dealership reach has never been so powerful. However, digital tools should not be viewed as a disruptor to a dealership’s traditional sales process. They should be a means to enhance the overall experience and efficiency of a dealership’s best practices.

Q: What can dealerships do in other areas of operations – such as F&I and service – to help maintain sales departments challenged by higher interest rates?
 

Wadeson: Given the rapid change and evolution of the industry, dealers and OEMs should be constantly challenging their sales processes, best practices and tools. They should be open to new products and tools that help with vehicle sales to ensure they’re staying current and capitalizing on what’s available. For example, TDAF has several key value-adds for dealers. This includes our TD Wheels app that provides customers with the information they need to begin the vehicle purchase process and then provides dealers with pre-qualified leads at no charge. Another example would be our New to Canada program that offers flexible auto financing solutions to help meet the needs of newcomers to Canada, providing opportunities to finance vehicles even for consumers with limited or no Canadian credit history. By staying current on what’s available, dealers and OEMs can leverage special programs to maintain sales despite higher interest rates. As we know, customers are looking for value and are conscious of affordability in the face of inflation, so this is an excellent opportunity to leverage unique products that would benefit them.

Q: Will leasing and certified pre-owned sales become more important with higher interest rates?
 

Wadeson: Not necessarily. Historically, rising interest rates and higher overall costs have impacted all products evenly across the board. This means retail incentives, certified pre-owned (CPO) sales and lease landscape rates will increase similarly. Over the past five to 10 years, we’ve witnessed a shift toward payment sensitivity in Canadian dealerships away from rates. Ultimately, consumers remain payment-conscious and hyper-aware of their monthly budget when making vehicle purchases, regardless of whether they’re leases, retail purchases, CPOs, etc.

Q: Assuming that consumers buy less-expensive vehicles, what can dealerships do to make up the revenue shortfall?
 

Wadeson: We encourage dealers to use the full suite of products available with full-spectrum lenders like TDAF, with a greater focus on underserved and growing segments of buyers. This would pertain to opportunities such as near-prime, non-prime, New to Canada and first-time buyers, small businesses, etc.

Utilizing the flexibility of TDAF’s programs – including term length, rate and structure – can also help create opportunity for the sale of additional products and services inside the business office.

Q: Some consumers may delay a vehicle purchase because of higher interest rates. What can dealerships do to overcome this hesitation?
 

Wadeson: The average consumer will likely continue to purchase vehicles as the need for replenishment continues its cycle. These customers will remain payment-conscious and be hesitant to increase their monthly payment obligation. However, there is a segment of the population that delayed car purchases during the pandemic for various reasons and whose want for a vehicle will become a need in 2023. It’s not a question of if these customers will purchase, but when. To draw these customers off the bench, be sure you are consistently communicating with your current customers to leverage additional incentives and bonuses available from your automotive finance and OEM partners. Despite all of the headwinds and challenges, TDAF remains cautiously optimistic that 2023 can be a year of growth. The pie may be smaller, but that doesn’t stop organizations from taking a bigger share.

ABOUT THE PANELIST
 

ANDY WADESON 
Vice President, Sales and Distribution
TD Auto Finance

With more than 17 years of progressive experience in the automotive finance industry, Wadeson applies his breadth of knowledge to lead a highly engaged and results-oriented sales team across Canada.