“What is old is new again.” Wow … I sure am hearing that ― and saying it myself a lot ― lately. As we all focus on products that are right for our accountholders, we need to truly understand the consumer’s needs from their perspective. We may not need to create different products; but, we may need to deliver our existing products with more purpose and focus.

Figure 1: Inflation – Consumer Price Index

Inflation Has Lessened but Is Proving Stubborn

Sources: Bureau of Economic Analysis, Bureau of Labor Statistics

Consumers are in a tough position right now: While consumer savings were previously increasing, the trend has now reversed. Everything costs more for our accountholders due to stubborn inflation. Yes, it is better now, but it’s still higher than the general consumer expects.

Our accountholders are getting hit squarely in the pocketbook: The price of fuel, basic groceries and other items ― all of it is at a high level of inflation.

What Are the Opportunities?

From a lending perspective, however, auto loans have gotten stronger. Availability is better, and consumers have been waiting for the opportunity to purchase their next new or used car.

So, the next consumer problem is that ever-increasing monthly car payment. According to The Zebra (2023), “… at the beginning of the past decade, average new car prices increased less than 3% annually until the COVID-19 pandemic began. Between 2019 and 2020, prices rose by 5%. Then, average new car prices spiked ― by 17.2% ― between 2020 – 2021. Similarly, an average car payment for new vehicles rose 11.8% … in 2021.” 

Figure 2: Consumer Credit Growth (Indexed to Prepandemic Levels)

Auto Loans Are Fastest Growing Category of Consumer Debt

Source: U.S. Federal Reserve

With car prices spiking, consumers are also facing lending rates higher than many have seen in years. Now let’s think about it from the Millennial and Gen Z perspectives ― car prices are higher than they have ever seen. This is a whole new ballgame for them.

Lending has shown great growth in the auto area, as it is indexing better than 121 through mid-2023. It is well above where we were during the preCOVID-19 period and without the inventory issues that consumer faced back then. So … even with increasing pricing and rates, consumers are still spending their hard-earned money on automobiles.

Now, back to where I started ― the idea that your product development should be through the lens of consumer usage and needs. You may think, “A car loan is a car loan, so how can I be creative around that?” But let’s start with the consumer’s perspective. I, the consumer, need/want that car, and it is more expensive than before. Consumers buy a car based on the monthly cost to them. If we take that perspective, how can we structure a financing product in a way that gives the consumer a lower monthly payment option?

Ford Credit did just that. The standard purchase option allows the consumer to enjoy their chosen auto without any mileage limitations and the freedom to customize it how they want. Of course, leasing provides them with other flexibility but imposes restrictions on mileage and changes to the car. But Ford says the Flex Buy option allows for lower payments for the first half of the term when compared to the standard contract. And it’s available in most states, of course. So, this “exclusive payment structure” merely splits the amortization to lower the payment by 15 to 18 percent for the first portion of the loan ― and then the payment increases later, to pay off the loan. Often, this allows the consumer to get a payment that fits their budget. And, they can prequalify in 5 minutes online. (Insert additional thinking here: “The company is easy for me to do business with!”)

This is nothing new. It is what we do every day … amortize payments to pay off a loan with a specific interest rate. Easy stuff, really ― right? But Ford looked at it from the consumer’s perspective: “Want that car … but can afford only X monthly payment.” Poof! There it is. Lower payment up front for the consumer (or, conversely, a more expensive car than they could have afforded without the 15 to 18 percent payment discount at the beginning).

Now, Ford may have made it easier to get the consumer into a new car than expected, but we all see the issues going forward:

•          Will the car depreciate too quickly, leaving the consumer under water when it comes to trading in before the term ends?

   

• ·         What if the car is totaled in an accident? The car loan may not yet be paid in full, unless the consumer has purchased gap insurance.

   

•          And, after the reduced payment period ends, can the consumer handle the new, increased payment?

   

  Ultimately, our products are not new ideas. We’re just reinventing what we have while always keeping the consumer’s perspective. You don’t like that example? Well, then, think about the idea of Buy Now Pay Later: It is the old layaway product that you once did at the retailer, but you get your stuff now!

  Key Takeaways

   

  1.     Reach back into your memory bank ― what products or product features can you reinvent (or how can you use existing components from other products) to meet consumer needs?

  2.     Be sure you are considering the consumer in your product design itself.

  3.     Do not forget about possible pitfalls: What issues may arise, from the consumer’s perspective?