Expert Insights: The Implications of Rising Interest Rates

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.