How Higher Interest Rates Limit New Car Sales Case Study

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Car Sales and Interest Scenario Analysis

A finance manager employed by an automobile dealership believes that the number of cars sold in his local market can be predicted by the interest rate charged for a loan. The finance manager performed a regression analysis of the number of cars sold and corresponding interest rates and identified a direct correlation, with fewer cars sold as the interest rates increased. This case study assesses whether there are other salient factors besides interest rates should be taken into account in this regression analysis, and whether the interest rate charged for a loan is the most important factor. A discussion concerning how a finance manager would respond to the dealership's vice president of marketing's request for a sales forecast at the prevailing rate of 7% is followed by an analysis concerning whether the prediction of car sales at 7% interest is a reflection of the current downturn in the economy and its potential implications for the dealership.

Are there factors other than interest rate charged for a loan that the finance manager should consider in predicting future car sales?

At present, there are a number of trends that will inevitably affect new car sales levels for the foreseeable future, including the following factors:

The vast new popularity of leasing versus buying a vehicle outright;

The growing preference for no-haggle selling;

The gradual upgrading of non-prime or sub-prime lending from an expedient for the few to a legitimate financing option for a larger segment of the vehicle-buying public;

More use of credit scoring models to qualify prospective purchasers of vehicles; and,

Tiered lending rates based on consumer credit scores (For auto finance specialists it's a whole new ball game, 2009, p. 51).

Is interest rate charged for a loan the most important factor to be considered in predicting future car sales? Explain your reasoning.

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The dealership's vice-president of marketing has requested a sales forecast at the prevailing interest rate of 7%.

At a prevailing interest rate of 7%, the finance manager's regression analysis indicates that between 300 and 400 cars will be sold (the time frame for car sales is unspecified in the regression model).

As finance manager, what reasons would you convey to the vice-president in recommending this forecasting model?

While there are other factors involved in the decision to purchase a new vehicle, the regression model is clear evidence that higher interest rates result….....

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