Credit availability, interest rates on dealers' minds

Credit availability among consumers is the No. 2 concern holding back business, dealers say according to a recent survey.

But rising interest rates could quickly outpace other factors that present challenges for customer financing.

The latest Cox Automotive Dealer Sentiment Index, a quarterly survey of auto dealers, finds that dealer worry over rising interest rates has sharply increased. Among franchised dealer respondents, 21 percent mentioned interest rates in the current index, up from 4 percent a year ago.

The Cox survey measures dealers' perceptions of the past 90 days and expectations for the next three months. It identifies key factors affecting retailers' optimism or pessimism. The latest study, conducted April 30 to May 14, had 1,053 franchised and independent dealer respondents.

Credit availability concerns remained consistent overall from last year's study, with 36 percent of all respondents mentioning difficulty. But concern among franchised dealers, who are generally at a financing advantage over their independent counterparts, is growing.

Twenty-four percent of franchised retailers cited consumer credit availability concerns in the second quarter, from a year-earlier level of 19 percent.

The No. 1 concern cited in the survey, overall and for franchised dealers, was market conditions. That position was unchanged from a year ago.

In the meantime, loan rates have increased dramatically in the past six months, Jonathan Smoke, Cox Automotive's chief economist, told Automotive News, and dealers are taking notice. The average best available interest rate for auto loans in May rose to 4.26 percent, an increase of 104 basis points over year-earlier rates, according to Bankrate.com.

Climbing interest rates was the No. 8 worry for franchised dealers and No. 6 overall. Last year, rising interest rates were No. 12 overall and No. 13 among franchised dealers, not even a factor, Smoke said.

Higher interest rates lead to higher payments, which eventually make vehicles unaffordable for some consumers, he said. Difficulty obtaining credit shifts customers out of the new-vehicle market and into the used.

"It's hard to conclude that we're going to see strong growth in sales in future months as those things all come to roost eventually," Smoke said.

The next index report will be released in September.