The automotive industry is undergoing a seismic shift in how vehicles are financed. 

With car buyers facing rising interest rates, longer loan terms, and a growing desire for flexibility, dealers must rethink their financing structures to align with evolving customer expectations. At the same time, dealerships must mitigate risks associated with chargebacks and cancellations — issues that have become more prevalent as the economy fluctuates.

But beyond those immediate concerns, lending trends often provide a deeper look into household financial health, influencing consumer appetite for big-ticket purchases like cars. Understanding the trends reveals not only where the industry stands today but also helps dealers, investors and consumers prepare for what’s ahead.

Consumer Financing Preferences Evolution

Today’s car buyers expect financing options that provide greater control, transparency and adaptability. Many consumers are struggling with affordability; in the fourth quarter of 2024, 19% of new-car buyers in the United States committed to monthly payments of $1,000 or more, according to data from Edmunds. Additionally, 18% opted for 84-month loan terms, reflecting a growing trend in extended financing options. The financial strain has led to a rise in loan cancellations and chargebacks, which hurt dealership profitability.

Additionally, consumers are pushing back against extended loan terms, and many dealers now recognize that placing customers in loans that long increases likelihood of default. Some dealerships are taking proactive measures by structuring financing strategies that shorten loan terms by at least 10%, ensuring that customers retain more equity and reducing the risk of repossession.

Lending Trends Reshaping Auto Finance

The latest lending trends provide further insight into what’s happening in the market and how financing strategies may need to evolve.

Trend No.1: Repossessions Are on the Rise, but It’s More Correction Than Crisis

Recent data from Cox Automotive indicates a 23% year-over-year increase in vehicle repossessions, with levels 14% higher than prepandemic figures. Similarly, a report by the Consumer Financial Protection Bureau says that between 2019 and 2022, repossessions increased by 23% across major lenders.

While those numbers might seem concerning at first glance, industry experts suggest that the uptick is less about financial distress and more about the market returning to normal after years of artificial suppression. During 2020 and 2021, widespread stimulus programs, loan accommodations, and lender flexibility kept repossession rates unusually low. Now with those temporary safeguards fading, the numbers are adjusting back to historical patterns.

What’s keeping this from turning into a full-blown crisis?

• Borrowers with strong credit remain stable. Those with prime credit scores continue to make payments on time, and delinquency rates among this group remain low.

• Riskier loans are less common. The share of subprime auto loans—typically the most prone to default—has dropped significantly, meaning fewer high-risk loans are in circulation.

• Lenders are still approving loans. Unlike in past economic downturns, they are not pulling back entirely on credit, and some are finding innovative ways to extend financing to those with limited credit history.

Trend No. 2: Loan Extensions Delay Defaults But With Long-Term Challenges

Rather than pushing struggling borrowers into repossession, many lenders are offering loan extensions and modifications to keep them in their vehicles. While this approach provides short-term relief, it also creates long-term financial challenges.

Here’s how it plays out:

• Extending loans leads to higher interest costs. A borrower with a high-interest loan who skips payments for a couple of months isn’t getting a free pass—the interest continues to accrue, adding to the overall loan balance.

• Some borrowers are caught in a cycle of deferral. In extreme cases, borrowers extend payments for a year or more, making little to no progress in reducing their principal balance and sinking further into negative equity.

• Dealers may see more financing challenges. With lenders tightening approvals for subprime borrowers, some deals that would have been approved in previous years may now fall through, impacting dealership profitability.

While the extensions prevent an immediate wave of defaults, they may be delaying financial stress rather than eliminating it, a risk both lenders and dealers will need to monitor closely.

Trend No. 3: Interest Rate Cuts Aren’t Reaching Car Buyers, and Inflation Adds to Pressure

Despite the Federal Reserve lowering interest rates, auto financing costs remain high. Early this year, the average interest rate for new-car loans climbed to 9.25%, while used-car loans hit about 14%, according to Dealertrack data.

At the same time, the cost of vehicle ownership is rising:

• Car insurance premiums have soared 44% in recent years, with high vehicle prices driving up coverage costs.

• Routine maintenance and repairs cost 13% to 16% more than before, largely due to labor shortages and increased parts prices.

With inflation still straining household budgets, many potential buyers are holding off on vehicle purchases, anticipating that prices may drop. This cautious consumer behavior could lead to a slowdown in auto sales, forcing dealerships to rethink pricing and financing strategies to keep inventory moving.

Innovative Financing: Aligning With Consumer Pay Cycles

To address the changing consumer preferences and economic pressures, leading dealers are exploring financing structures that match consumers' pay cycles. Instead of relying solely on traditional monthly payments, some forward-thinking dealerships offer biweekly payment structures, allowing customers to align their auto loan payments with their incomes.

This approach provides several key benefits:

• Improved cash flow management: Consumers can better budget smaller, more frequent payments instead of one large monthly bill.

• Accelerated equity growth: More frequent payments reduce principal faster, lowering overall interest costs and increasing vehicle equity.

• Reduced negative equity: Faster principal reduction makes it easier for consumers to trade in their vehicles when needed.

Dealers that implement these flexible payment structures are not only making auto financing more manageable for buyers but are also creating long-term financial stability that benefits both consumers and dealerships.

The Compliance Factor: Keeping Dealers and Customers Protected

In an era of heightened scrutiny, compliance is a top concern for dealerships. Regulatory agencies are increasing their focus on full disclosure in financing agreements.

Dealerships that prioritize transparency, such as providing a one-sheet summary of all fees, are building trust with consumers while reducing legal risks. Additionally, major dealership groups like Sonic Automotive and Group 1 Automotive are implementing standardized rate disclosures to prevent predatory lending practices.

The Future: Striking the Right Balance

Looking ahead, dealerships must refine their financing strategies to balance consumer needs with dealership profitability. That requires:

• Offering payment structures that align with customers’ income schedules.

• Reducing loan terms to prevent negative equity.

• Enhancing compliance and full disclosure practices.

• Addressing chargebacks and cancellations through proactive financial planning.

By adapting to the evolving expectations and staying ahead of lending trends, dealerships can position themselves as trusted advisers, foster customer loyalty, and ensure long-term financial stability in a changing market.

LEARN MORE: Is the Death Knell Being Sounded for Dealer Financing?

Damon Walker is senior director of national sales for AutoPayPlus by US Equity Advantage.

EDITOR’S NOTE: This article was authored and edited according to F&I and Showroom editorial standards and style. Opinions expressed may not reflect that of the publication.