Consumers have started to sock away their money, typically a good sign for the economy in the long run. But the effects on auto finance are yet to be decided.
These days, the personal savings rate has climbed to 6%, from about 1% in 2005. Higher savings typically encourage more investing and lead to improving standards of living, pointed out Chicago Fed Economist Bill Strauss in a presentation yesterday at the Auto Finance Summit.
But if consumers are saving more, they’re spending less — a scenario that could hurt the economy in the short term. Consumer credit outstandings, as compiled by the Federal Reserve Board, fell to $2.42 trillion in the second quarter, from $2.51 trillion in the prior-year quarter.
To boot, car dealers have noted lately an increase in cash buyers. With the saving mentality, some consumers figure that if they’re going to buy a car, they should do it without credit. It will be interesting to see how long this shift in mindset continues.
My guess: another 12 to 18 months.
This is strictly good business decisioning. Every time customer becomes”seriously” delinquent, you need to make a business decision. When vehicle values are looking like this, it’s an easy one. Add to that responsible lending practices with low LTV’s at the time of origination, your losses are going to be minimized and profits soar. No reason to carry these type of loans in delinquent status.
I’m not sure it works that way; i.e., in X time, the overall mindset will flip a switch back to aggressive consumerism. I think it has to do with who lived through this “Great Recession” and who didn’t. It’s a generational thing. My grandparents (RIP) were in their 20’s and starting a family during the Great Depresssion. They were tight about taking on credit, and they NEVER changed their mindset as long as they lived. Their children (my mother among them) were more aggressive in their buying habits, but less so than I am, and so on. So I think people who lost their jobs, their homes, their 401(k)’s, etc—they will remember a long, long time, and their mindsets will change very, very gradually, if at all. Their kids, maybe less time. Hedgefund managers never changed in the first place.