Rate cuts, EV adoption and tech spark optimism for 2025

Auto lenders are keeping an eye on affordability, EV adoption and technological advancement heading into 2025. A key challenge this year has been affordability, which was exacerbated by elevated interest rates and higher sticker prices. Meanwhile, EV adoption improved but hasn’t reached the level many expected a few years ago. And while auto companies have built more automation into their operating systems, many still logged declines in origination volume for much of 2024. [caption id="attachment_58345832" align="alignnone" width="9030"] Photo/Auto Finance News[/caption] However, industry leaders expressed optimism for a better year in 2025 at Auto Finance Summit 2024, where nearly 40 speakers and more than 500 attendees gathered earlier this month in Las Vegas. Looking ahead, lenders foresee interest rates falling further, EV adoption picking up, even if more slowly than expected, and technological advances remaining a priority. “Between vehicle prices normalizing as well as some of the subvention we're seeing in the market, the consumer has been waiting for this for a long time,” Betty Jotanovic, president of Chrysler Capital and auto relationships at Santander Consumer USA (SCUSA) , said during a panel discussion at the summit. Navigating interest rate decline After the Federal Reserve hiked interest rates 11 times starting in March 2022, it saw enough positive economic news to cut interest rates by 50 basis points last month in the first reduction since March 2020. Rate cuts will take time to trickle down into auto , but the consensus among industry executives at the summit was that the cost of doing business for auto companies will improve alongside vehicle affordability for consumers. [caption id="attachment_58345833" align="aligncenter" width="1920"] From left: Auto Finance News' Amanda Harris; Ian Anderson, of Westlake Financial; Douglas Arrigo, of Chase Auto; Betty Jotanovic, of SCUSA; and Mike Lavin, of Consumer Portfolio Services, at this month's Auto Finance Summit 2024 | Photo/AFN[/caption] Consumer Portfolio Services (CPS) , for one, has seen demand increase despite elevated interest rates. The subprime lender’s application volume increased 16% from yearend 2023, President, Chief Operating Officer and Chief Legal Officer Mike Lavin said during a panel discussion at the summit. The rate cut was beneficial to CPS’ cost of funds and profitability, he said. The lender, which relies on the asset backed securitization (ABS) market for funding, aims to do four ABS transactions per year — and rate cuts impact cost of funds. “We had an ABS deal in the market right after the Fed rate cut, and we saw our cost of funds go down 100 [basis points (bps)],” Lavin said. “That goes right to our bottom line and raises our yield and raises our ROA [return on assets]. As long as we can keep our APR strong, we feel future rate cuts go right to our bottom line.” Consumers also will benefit from interest rate cuts. And some are holding off on vehicle purchases until rates come down, SCUSA’s Jotanovic said. “This is just the beginning; we need more,” she said. “We will see more subvention in the market as it becomes more affordable for OEMs to work with their captives to subvent those rates. The consumer will start to see that benefit as well.” Lower interest rates translate into lower monthly auto loan payments, Doug Arrigo , chief financial officer at Chase Auto , said during a panel discussion at the summit. Other factors are also contributing to the likelihood that affordability will improve in 2025, he said. “Interest rates alone won't help with [affordability]." — Doug Arrigo, CFO, Chase Auto “The initial [rate] cuts help with affordability, [but] interest rates alone won't help with it,” Arrigo said. “With new-car production up and inventory filling up on dealers' lots, it’s going to help with incentives. More needed But some auto executives are less optimistic about the initial rate cut. Consumers are still hesitant to buy a new vehicle, with another 50 bps to 100 bps rate cut needed to start influencing affordability, Ian Anderson , group president at Westlake Financial , said during the panel discussion. “We need more aggressive moves downward for it to spur more purchases from consumers,” he said. [caption id="attachment_58345835" align="aligncenter" width="1920"] From left: Auto Finance News' James Van Bramer; Paul Fortin, of Exponential Markets; Jonathan Gregory, of Cox Automotive; Kristen Lanzavecchia, of J.D. Power; and Eric Lyman, of Black Book, at Auto Finance Summit 2024 Photo/AFN[/caption] Also mitigating the immediate relief provided by the Fed’s interest rate cut is the fact that a decrease had been expected and had largely been priced in already, Kristen Lanzavecchia , director of industry solutions at J.D. Power , said at the summit. Therefore, cuts minimally lowered monthly payments, she said. “We did some analysis on a 72-month new-vehicle monthly payment. It's about a $10 lower monthly payment with [the Fed’s cut],” she said. “It has to be much more significant than that to see that pass through to the customer." Most lenders feel more cuts are coming, and these should lower monthly loan payments further. “It'll start getting that person off the couch,” Jonathan Gregory , senior manager of economic and industry insights at Cox Automotive , said at the summit. Another possibility is that auto refinance activity will pick up as rates fall . [caption id="attachment_58345845" align="alignleft" width="205"] Fabien Thierry | Photo/AFN[/caption] Bank of America has already seen a slight uptick in refinance volume after the Fed’s September cut, Fabien Thierry , head of consumer vehicle lending products at the bank, said during a fireside chat at the summit. “We have a refinancing product. The market has been dormant with the rate environment, and we’re starting to see a slight pickup with the first [interest rate] change … in the last couple of weeks,” he said. EV adoption, residuals in focus Despite lingering concerns about EV adoption, sales of the vehicles have continued to make up a large portion of the market, driven by tax incentives . EV sales ticked up 1% year over year to 107,127 units in September, down 14.4% month over month, according to an Oct. 22 report from Cox Automotive. EVs made up a record 9% of new-vehicle sales in September. Used-EV sales jumped 68.3% YoY and 1.9% MoM to 26,626 units, holding a 1.7% market share, according to Cox. [caption id="attachment_58345838" align="aligncenter" width="1024"] From left: Auto Finance News' Ashley Savage; Chris Bresnahan, of Chase Auto/Subaru Motors Finance; Peter Glenn, of EV Life; and John Possumato, of DriveItAway, at Auto Finance Summit 2024 | Photo/AFN[/caption] To drive significant sales, tax incentives need to remain available for both new and used EVs, Peter Glenn , co-founder and co-CEO of electric vehicle fintech EV Life said at the summit. Eliminating federal tax credits wouldn’t end EV adoption but would delay it, he said. “If, for some reason, those credits went away, or changed in some way, it's not the end of EV adoption. It's just going to slow things down or make progress uneven, because 14 or 15 zero-emission states are driving this forward,” Glenn said. “They have bans on new gas cars sold on the horizon in 2035, and California is on pace to hit that goal.” Technology may benefit EV adoption moving forward, Chris Bresnahan , regional sales director at Chase Auto/ Subaru Motors Finance , said at the summit. An EV is not a durable-goods purchase; it is more akin to purchasing an iPhone, he said. So leasing will remain an attractive option for EV adopters and drive new purchases. “The technology is going to continue advancing in consumer electronics, just like it advances in your vehicle,” Bresnahan said. “And tech-savvy people are going to want the newest and latest [technology], so leasing is a perfect way to make that happen.” Leasing comprises 48.7% of new EV purchases, according to a TransUnion leasing study released Aug. 1. Eye on residuals That said, residual values remain a concern and value guarantees will help spur sales of used EVs, John Possumato , CEO of mobility platform DriveItAway , said during an EV panel discussion at the summit. Residual value guarantees are a “great safety valve that [make EVs] great used-car buys in general,” he said. A used EV “might not be my first choice as a consumer for a used car, but if my alternative is a much higher mileage, more expensive [internal combustion engine] unit, I'm going to go in [the EV],” he added. "I don't think these residual value guarantees are foolish by the OEMs. I think they're very premeditated,” Possumato said. [caption id="attachment_58345839" align="aligncenter" width="1024"] Scott Painter, CEO and founder of Autonomy, at Auto Finance Summit 2024 | Photo/AFN[/caption] While EV tax incentives are driving adoption, the federal government guaranteeing residuals would do more for EVs in the long run , Scott Painter, CEO of EV subscription provider Autonomy , said during an EV panel at the summit. “It will be impossible for companies like us to own these assets without having a residual value guaranteed asset discount,” he said. Prioritizing automation The auto industry continues to innovate and use technology to automate the auto financing process. [caption id="attachment_58345844" align="alignright" width="202"] Shannon Mokhiber | Photo/AFN[/caption] For example, Ford Credit will be “ launching a new platform next year that will help us know the customer a little bit better,” Shannon Mokhiber , executive vice president for North America, said during a fireside chat at the summit. The platform will allow the company to learn the most “effective” time and channel to reach a customer, such as via a text message or phone call, she said. [caption id="attachment_58345843" align="alignleft" width="181"] Matt Dundas | Photo/AFN[/caption] Similarly, Carvana is using technology to gather consumer data and identify business trends, Matt Dundas , vice president of finance at the retailer, said at the summit. “Technology has changed the way that we’re extracting insights and figuring out where to prioritize our efforts,” he said. [caption id="attachment_58345840" align="alignright" width="176"] Anne Alburo | Photo/AFN[/caption] Meanwhile, Chase Auto has invested in technology to speed the e-funding process to just minutes, Anne Alburo , national credit executive at Chase, said at the summit. The tech assists in providing faster cash flow to commercial and retail consumers, she said. Streamlining the e-funding process “is starting to gain traction, and we expect [more] of our application volume to go through this process by the end of the year,” Alburo said. Follow all the latest news from this month’s Auto Finance Summit here.

Rate cuts, EV adoption and tech spark optimism for 2025

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