Auto loan rates are rising – but there’s still good news for car buyers

Car buyers will likely have more options this fall, but it could be a more expensive time to buy due to the highest auto loan rates in years.

Auto industry experts say the market is moving in response to the Federal Reserve raising interest rates to fight inflation.

Fed rate hikes pushed the average interest rate for new vehicle financing up to 5.7% in the third quarter of 2022, from 4.3% at the same time last year and the lowest level. highest in three years, according to Edmunds.

Rising borrowing costs will keep many consumers from buying new vehicles, experts say.

“High prices and rising interest rates are giving consumers a boost by catapulting monthly payments into a new realm,” Jessica Caldwell, executive director of information at Edmunds, said in a statement.

The average monthly payment for new vehicle purchases was over $700 throughout the third quarter of 2022, according to Edmunds. As new car prices have skyrocketed over the past year and auto loan rates have risen, more than 14% of new car buyers are now paying more than $1,000 for their monthly payments, an increase compared to 8.3% a year ago.

Improving the supply chain and less competition on the buyer side could lower prices and improve affordability down the road, but it remains to be seen exactly how prices and auto loan rates will evolve in the coming months.

The supply of new cars is likely to improve

As supply issues ease and higher interest rates slow consumer spending, officials expect less competition for many categories of financed purchases, including new vehicles and used. Federal Reserve Governor Lisa Cook said in a recent speech that price inflation was slowing in the auto market.

“Wholesale prices for used vehicles have fallen significantly, but there is some uncertainty about how long it will take for this fall to affect consumer prices. Similarly, prices for new cars are expected to fall. moderate over time as new vehicle production continues to increase,” she said.

From September to August, wholesale prices for used vehicles fell 3% as the supply of used cars recovers, according to Cox Automotive, the parent company of Kelley Blue Book. Retail prices typically fall after wholesale prices fall, and retail prices for used cars have also fallen in recent months.

The supply of new vehicles is also improving following pandemic disruptions to the auto industry, but Cox experts worry that as dealers get more cars in stock, Americans won’t be able to afford the loans they would need to buy them.

“Just as the industry is about to start seeing volumes rise from recession-like lows, rapidly changing interest rates are reducing demand,” said Jonathan Smoke, chief economist at Cox, in a report.

High prices and big car loans

Americans who bought cars in the third quarter of 2022 took out bigger loans than ever, according to Edmunds. The average amount funded increased to $41,347 from $38,315 the previous year.

New vehicle prices are also at an all-time high in the United States, according to Kelley Blue Book. Consumers paid an average of $48,301 for new cars in August.

Smoke says the new automotive landscape in the United States is going to become more of a “luxury” market. Automakers will likely try to accommodate higher-income buyers who can get better loans and can still afford cars in the current economy, he says.

Low-income homebuyers are particularly hard hit by rising rates because they can’t get such favorable loans initially. When monthly payments increase, it becomes impossible for some low-income buyers to afford a new car, Smoke says.

Over the past two years, the share of car buyers opting for loans of 48 months or less has more than doubled, according to Edmunds. Shorter car loans generally have lower interest rates. The trend indicates that buyers who can afford to pay more on a monthly basis are looking for ways to reduce interest charges.

For buyers who cannot afford to pay more in the short term, it could remain difficult to buy a car unless interest rates or prices drop. But the downward trend in used car wholesale prices gives hope that affordability may improve in the future.


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