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5 minutes read. Released March 22, 2023

Writen by Rebecca Betterton Written by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the details of borrowing money to purchase the car they want.

The edit was done by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain confidence to take control of their finances by providing clear, well-researched information that breaks down complicated subjects into bite-sized pieces.

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The last two years of car prices have been a rollercoaster for both the sellers and drivers. This summer saw record-high transactions, and an MSRP above $48,000, according to Kelley Blue Book (KBB) and followed suit. Fortunately, prices for cars are on the rise this holiday season, since they hit their peak in the summer. But — simultaneously — interest rates have been increasing. This synchronous increase in rates and a decrease in price has undermined any tangible wins for consumers. Interest rates for new vehicles were up in October from 4.2 percent a year ago, according to Edmunds information. This has created an unhappy situation for motorists getting some relief over the sticker cost. As the possibility of the recession is looming, it is important to understand how can influence the monthly cost to own a vehicle. Monthly payments are increasing by 3.3%. The monthly payments are based on a number of factors, like the vehicle as well as the loan duration. But the cost is also dependent on the benchmark rate set by the Federal Reserve, which auto lenders utilize to . Since the Fed rate has increased -currently at 4.75-5 percent over the past year, the cost to borrow money has followed. This means lenders have increased the cost to finance. The more money you pay for financing, the greater the interest rates and the higher the monthly cost is. October set the record for the monthly average of new car payments costing $748 according to KBB. Even though prices have fallen by almost 5 percent, monthly payments are up 3.3 percent, according to a CoPilot study. While this percent increase may appear small, it adds up to over 1,000 dollars in the . This created an unfortunate outcome for those who were getting relief from falling vehicle prices. Any savings could end up being offset with the rise in interest rates. Even if vehicle transaction prices are more accessible, the will still be much higher — making it difficult for motorists to afford it in the beginning. Lower wholesale prices have not been translated into retail prices. Logic suggests that if wholesale prices are lower then the price consumers pay will follow — but unfortunately it’s not the situation. Since the start of the year wholesale prices have fallen more than 15 percent. But the average transaction price for vehicles remains more expensive. This is primarily due to the constant demand for new cars. October saw its highest level of new-vehicle inventory since the beginning of May in 2021. But just because the cars are available more readily doesn’t mean that drivers are able to afford the cost of buying them. For many it is clear that the price to purchase right now is not worth the cost. As mentioned, October set record-breaking monthly payments of nearly $750, according KBB. So, even though vehicles inventory increased, it remains low by norms of the past. This shortage of inventory results in continued high prices for the retail market. Increase in credit union car loans A reaction to the high interest rates has driven some borrowers to borrow with . The difference between financing with a credit union is based on the cash available. Credit unions are member owned and are not profit-driven that means they typically have less fees and lower loan interest rates. In the second quarter of 2022, Experian discovered that credit unions have been growing in market share over the past five years, while falling in line with the Fed increasing interest rates. The ability to get financing through credit unions is just one way that drivers are finding relief in this . The fight of the Fed to curb inflation will not end anytime soon. Federal Reserve walks a thin line between controlling inflation and ensuring affordable prices for consumers. The auto market is one instance of an area the areas where inflation isn’t in control. Unfortunately, these higher rates are likely to go away anytime soon. “Affordability will be in doubt for a long time to come in both the used and new markets,” explains Cox Automotive Chief Economist Jonathan Smoke. “It’s not the Fed’s fault however, it could impact the accessibility of transportation for consumers.” KBB found an average wage earner must put in 40 weeks of work to finance an automobile. Statistics like these, Smoke says, make car financing particularly difficult for lower earners. “Higher rates are already shifting access to cars and financing to more wealthy consumers,” he says. Access to cars is also a problem that means that it is difficult for consumers to react as they might have had to in similar difficult economic times. Looking back to the 2008 recession, consumers enjoyed the benefits of incentives for vehicles and an influx of dealerships looking to sell. With fewer vehicles available and less incentive provided to motorists. Two main reactions to the probability of inflation rising are overall debt growing — reflected in increased delinquency rates, and drivers who are experiencing higher rates of depreciation. The amount of auto loan debt continues to increase overall loan balances have increased 8 percent between quarter one of 2021 until 2022 according Experian. This is reflected in the huge . In addition to overall growth in debt, the number of has also seen a jump. The second quarter in 2022, TransUnion discovered the following: 3.34 percent of auto loans were over 30 days in arrears. This is among the highest rates of delinquency in the past few years. While it’s true some of this is due to accounts that have been logged following the pandemic, this increase is still notable especially for subprime borrowers who are the most affected. “Delinquencies remain in line with the historical average for the majority of credit products. However, levels have been rising over the past year, especially among subprime consumer segments” states Michele Raneri, vice president of U.S. research and consulting at TransUnion. It is also predicted that auto loan amounts will be higher than any remaining student loans in the first quarter of 2023, according to the Consumer Financial Protection Bureau. This increases the domino effect that actions by Central Bank actions Central Bank have on vehicle affordability. Therefore, when delinquencies are returning to pre-pandemic levels, it is important to understand how increasing interest rates will continue to create a costly situation, thereby increasing the chance of delinquency. Drivers are confronted with faster-than-usual vehicle depreciation On in addition to the higher cost of cars along with interest costs, motorists are likely to lose money in the coming months due to the faster depreciation rate of vehicles, says Henry Hoenig, data journalist for Jerry. The primary reason for this is from the timing at which drivers purchase their vehicles. “People who bought used vehicles in the past year or two were charged exorbitant prices,” Hoenig explains. As the used car market cools these drivers are most at risk of rapid depreciation. However, it’s not the only bad news for vehicle owners. “For at least the next two years or so, used vehicle prices likely won’t fall back to where they were before the massive increase over the past two years,” Hoenig says. This is due in large part to the fact that supply isn’t expected to return to the normal levels anytime within the next few months. Now may not be the best time to buy cars. High costs for vehicles are not the only expense that Americans are currently being met with. “Consumers are under pressure on multiple fronts, first by this situation of high inflation and secondarily by the higher rates of interest the Federal Reserve is implementing to slow it down,” Raneri explains. A car purchase is among the most expensive purchases many individuals make. But with steep interest rates, patience may be a winning strategy. The fact that prices are high is perhaps inevitable, however, waiting for a major purchase such as a car can result in savings. If you don’t have the privilege of waiting make sure you are prepared to spend more money and consider tips to save money when purchasing an automobile in .

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Authored by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers with 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 from late 2021. They are committed to helping readers feel confident to manage their finances through providing clear, well-researched data that breaks otherwise complex topics into manageable bites.

Auto loans editor

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