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5 minutes read. Released March 22, 2023
Written by Rebecca Betterton Written by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers in navigating the details of using loans to buy a car.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since the end of 2021. They are committed to helping readers gain confidence to take control of their finances through providing clear, well-researched information that breaks down complicated topics into digestible chunks.
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The past two years of car prices have been a rollercoaster ride for both sellers and drivers. This summer was a record year for price transactions and an MSRP of $48,000 according to Kelley Blue Book (KBB) and followed suit. Fortunately, prices for cars have been leveling this holiday season, since the peak price of during the summer. However, simultaneouslythe interest rates are rising. This synchronous increase in rates and decrease in prices has degraded any real gains for consumers. Rates of interest for new cars increased in October to 4.2 percent just a year ago, according to Edmunds data. This has created a frustrating circumstance for drivers getting some relief over sticker price. With the prospect of the recession is looming and is a possibility, it is crucial to be aware of how this could ripple down and impact the cost of owning an automobile. The monthly payments have increased by 3% A driver’s monthly payment is based on a number of elements, such as the car and loan duration. However, the price is affected by the benchmark rate set by the Federal Reserve, which auto lenders utilize to . As as the Fed rate has risen — currently set at 4.75-5 percent — over the past year the cost of borrowing money has followed. The result is that lenders have increased their costs to finance. The more you spend for financing, the more the interest rates and thus the more expensive the monthly expense is. October set the record for average monthly new vehicle payments costing $748 according to KBB. Although prices have dropped by almost 5 percent and monthly payments have increased by 3.3 percent, as per the CoPilot study. Although the increase of 3.3 percent may seem small, it’s actually amounted to over 1000 dollars over the course of . This was a disastrous outcome for motorists who were feeling relief from declining price of their vehicles. Any savings could end up being wiped out with the rise in interest rates. Even if prices for car transactions are more accessible however, they will be much higher — which makes it difficult for motorists to afford it in the beginning. Lower wholesale prices have not been translated into retail prices. Logic says that If wholesale prices are less, then the price that consumers pay will follow However, that is not the case. Since the beginning of the year, wholesale prices have dropped more than 15 percent. But the average transaction price for cars is higher. This is primarily due to the continuing demand for new cars. October was the month with the highest amount of inventory of new vehicles since the month of May 2021. However, just because these vehicles are more readily available doesn’t mean that drivers are able to afford them. For many drivers, the cost to buy currently isn’t worth the cost. As mentioned, October set record-breaking monthly payments of nearly $750 according to KBB. So, even though automobile inventory rose but it’s still low by the standards of historical precedent. This limited available supply implies that prices will continue to rise for the retail market. The rise in credit union car loans Another reaction to rising interest rates has prompted some borrowers to finance with . The distinction between financing through a credit union is determined by the amount of money available. Credit unions are member-owned and are not for profit that means they typically have low fees and less loan interest rates. The second quarter ended 2022, Experian discovered that credit unions had trended up in market share over the past five years, while falling in accordance with the Fed increasing interest rates. Credit unions are a great source of financing. is just one way that motorists are finding relief from this . The Fed’s fight to quell inflation will not end anytime soon The Federal Reserve walks a thin line between regulating inflation and ensuring affordable prices for consumers. The auto market is one instance of an area which inflation isn’t yet at a level that is under control. And, unfortunately these rates are likely to be going away any time in the near future. “Affordability will be challenged for years to come in both the used and new markets,” explains Cox Automotive Chief Economist Jonathan Smoke. “It’s not the fault of the Fed however, it could impact the accessibility of transportation for consumers.” KBB found an average income earner will need to spend 40 weeks working to repay an automobile. These kinds of statistics, Smoke notes, are making car financing particularly difficult for lower earners. “Higher rates have already shifted access to cars and financing to wealthier customers,” he says. Access to cars is also a problem that means that it is difficult for consumers to respond as they would have done in similarly challenging economic times. When we look back to 2008’s recession, drivers could benefit from incentives for vehicles and an influx of dealerships eager to sell. But with less inventory available, there is no relief for drivers. Two major reactions to the possibility of inflation continuing to rise is that overall debt is growingthat is evident in the increased delinquency rates, and drivers who are experiencing higher rates of depreciation. Auto loan debt continues to increase In total loan balances have increased 8 percent in the first quarter of 2021 until 2022 according to Experian. This is reflected in the huge . On top of general debt growth the amount of debt increased. For the quarter that ended in the year 2022, TransUnion discovered that 3.34 percent of auto loans were more than 30 days late. This is one of the highest delinquency numbers in the past few years. Although it’s true that some of this is due to backlogged accounts following the pandemic, this rise is nonetheless notable, especially for subprime borrowers who are the most affected. “Delinquencies remain in line with historical levels for most credit products. However, they have increased in the past year, especially among subprime consumer segments” states Michele Raneri, vice president of U.S. research and consulting at TransUnion. The forecast also predicts that auto loan balances will surpass the remaining balance of student loans in the first half of 2023, as per the Consumer Financial Protection Bureau. This is a further confirmation of the domino effect that moves from Central Bank actions Central Bank have on vehicle affordability. Therefore, when delinquencies are returning to levels prior to the pandemic, it is important to understand how increasing rates of interest will create a costly situation, thereby increasing the likelihood of delinquency. Drivers are being met with faster-than-usual vehicle depreciation On top of high vehicle cost along with interest costs, car owners are likely to lose money over the months ahead because of the speedier depreciation of their vehicles, says Henry Hoenig, data journalist for Jerry. The main influence here comes from the time of year that the owners purchase their cars. “People who purchased used cars within the last year or two paid inflated prices,” Hoenig explains. The used car market is cooling, these motorists are at the highest risk of rapid depreciation. But it is not the only bad news for vehicle owners. “For at least the next two years or so, used vehicle prices are unlikely to fall back to where they were before the massive increase over the past two years,” Hoenig says. This is due mainly due to the fact that the supply will not return to its the normal levels anytime in the near future. This isn’t the ideal time to purchase a car High vehicle costs aren’t the only expenses that Americans are currently faced with. “Consumers are being pressured in a variety of ways, first by this climate of high inflation as well as by the higher interest rates that is the Federal Reserve is implementing to tamp it down,” Raneri explains. A car purchase can be one of the most costly purchases consumers make. And when interest rates are high, patience may be a successful strategy. The fact that prices are high is somewhat unavoidable however, waiting for a major purchase like a car could result in savings. If you do not get to wait for a car, be prepared to spend more money and look into ways to save money when purchasing the car you want in .
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Written by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers to navigate the details of taking out loans to purchase the car they want.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers gain the confidence to manage their finances by providing precise, well-researched and well-documented information that breaks down complicated topics into bite-sized pieces.
Auto loans editor
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