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5 minutes read. Published March 22, 2023
Authored by Rebecca Betterton Written by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers with the details of using loans to buy the car they want.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to take control of their finances by providing precise, well-researched and well-researched content that breaks down complicated topics into manageable bites.
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The past two years of prices for vehicles have been a rollercoaster for both drivers and sellers. This summer was a record year for price transactions that averaged over $48,000, as per Kelley Blue Book (KBB) and followed suit. Fortunately, prices for cars have been settling down this holiday season, since the peak price of this summer. But — simultaneously -interest rates have been rising. This synchronous increase in rates and a decrease in price has undermined any tangible wins for consumers. Rates of interest for new cars increased in October to 4.2 percent just a year ago, according to Edmunds information. This has compounded into an unhappy situation for motorists getting some relief over sticker cost. With the prospect of the recession is looming and is a possibility, it is crucial to be aware of how this could affect the cost of owning the vehicle. The monthly payments have increased by 3percent. A person’s monthly payments are based on a number of variables, including the car as well as the loan period. However, the price is dependent on the benchmark rate, which is set by the Federal Reserve, which auto lenders utilize to . Since as the Fed rate has risen -which is currently set at 4.75-5 percent in the last year the cost of borrowing money has also increased. The result is that lenders have increased their costs to finance. The more money you pay for financing, the greater the interest rates and thus the higher the monthly cost is. October set a record in monthly payments for new vehicles that cost $748, according to KBB. Although prices have dropped by almost 5 percent the monthly payment is up 3.3 percent, as per a CoPilot study. While this percent increase may seem small, it’s actually amounted to more than 1,000 dollars in the . This result was not good for motorists who were feeling relief from declining costs for vehicles. The savings that could be made are being wiped out by the rising interest rates. Even if prices for car transactions are less expensive but they’ll still be much more — making it difficult for drivers to in the beginning. Lower wholesale prices haven’t been translated into retail prices. Logic says that when wholesale prices are lower then the price consumers pay will follow however it’s not the scenario. Since the start of the year wholesale prices have decreased by over 15 percent. However, the average price for vehicles remains more expensive. This is due in part to the constant demand for new cars. October saw the highest volume of new vehicle inventory since the month of May 2021. However, just because these vehicles are available more readily doesn’t mean that drivers are able to afford the cost of buying them. For many buying a car right now is not worth it. As mentioned, October set record-high monthly payments of almost $750, according to KBB. Therefore, even though vehicle inventory showed a bump however, it is still low according to the standards of historical precedent. The limited supply of vehicles results in continued high prices in the retail sector. The rise in credit union car loans Another reaction to rising interest rates has prompted some borrowers to borrow with . The difference with financing with a credit union is dependent on the available money present. Credit unions are owned by members and not for profit, meaning they generally have less fees and lower loan fees and interest. The second quarter ended 2022, Experian discovered that credit unions have been growing in market share in the last five years, while falling in accordance with the Fed raising interest rates. Securing financing through credit unions is one way motorists are finding relief from this . The Fed’s fight to quell inflation is not going to end anytime soon The Federal Reserve walks a thin line between controlling inflation while ensuring that prices remain affordable for consumers. The auto market is one example of where inflation is not yet under control. And unfortunately the higher rates are not expected to be going away any time in the near future. “Affordability is going to be a challenge for a long time to come in both the new and used markets,” explains Cox Automotive Chief Economist Jonathan Smoke. “It’s not the Fed’s fault, but it will impact the accessibility of transportation for consumers.” KBB found an average income earner will need to put in 40 weeks of work to finance a new vehicle. Statistics like these, Smoke points out, are making vehicle financing especially challenging for lower earners. “Higher rates have already shifted the availability of vehicles and financing to more wealthy consumers,” he says. Access to cars is also a problem that means that it is difficult for consumers to respond as they may have in similarly challenging economic times. When we look back to 2008’s recession, drivers could benefit from incentives for vehicles and the rush of dealers wanting to sell. But with less inventory available and less incentive offered to drivers. Two of the main reasons for the probability of inflation rising are overall debt growing -which is reflected in higher delinquency rates and drivers who are experiencing higher rate of appreciation. Auto loan debt is continuing to rise. In total loan balances have increased 8 percent in the first quarter of 2021 to 2022, according Experian. This feeds into the massive . On top of overall debt growth the amount of debt increased. For the quarter that ended in the year 2022, TransUnion found that 3.34 percent of auto loans were more than 30 days late. This is one of the highest rates of delinquency in the past couple of years. While it’s true some of this is due to backlogged accounts due to the pandemic, the rise is nonetheless notable particularly for those who are the most affected. “Delinquencies remain at previous levels for the majority of credit products. However, the number of delinquencies has increased over the last year, particularly among subprime consumer segments,” notes Michele Raneri, vice president of U.S. research and consulting at TransUnion. It is also expected that auto loan balances will exceed any remaining student loans in the first half of 2023, as per the Consumer Financial Protection Bureau. This increases the domino effect that moves by Central Bank actions Central Bank have on vehicle affordability. So, as delinquencies return to pre-pandemic levels, it’s crucial to know how rising rates of interest will increase the cost of a vehicle, and thus the likelihood of delinquency. Drivers are confronted with faster-than-usual vehicle depreciation On the top of the high cost of vehicles along with interest costs, drivers will likely lose money in the coming months due to the faster depreciation rate of vehicles as per Henry Hoenig, data journalist for Jerry. The biggest influence in this situation comes from the time of year that drivers purchase their vehicles. “People who bought used cars in the past year or two have paid exorbitant costs,” Hoenig explains. As the used car market cools these drivers are at the highest risk of rapid depreciation. But it is not all bad news for vehicle owners. “For at most the next year or so used vehicle values are unlikely to fall back to where they were before the huge run-up in the last two years” Hoenig says. This is due mainly to the fact that demand won’t return to the normal levels anytime within the next few months. This isn’t the ideal time to purchase an automobile. The high costs of car ownership aren’t the only expenses that Americans are currently faced with. “Consumers are under pressure by a myriad of factors in the current environment of high inflation, and then by the increased rates of interest that the Federal Reserve is implementing to slow it down,” Raneri explains. Buying a vehicle could be among the most expensive purchases many consumers make. And with the high interest rates, patience may be a successful strategy. The reality of expensive prices is not a surprise, but waiting to make a large purchase like a vehicle can save you money. If you don’t have the luxury of waiting for a car, be prepared to spend more money and consider tips to save when buying a car in a .
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Written by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers to navigate the ways and pitfalls of taking out loans to purchase the car they want.
The edit was done by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers to control their finances with concise, well-researched, and clear information that breaks down complicated topics into bite-sized pieces.
Auto loans editor
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