Car shoppers on a budget can’t catch a break. The triad of skimpy selection, sky-high transaction prices and a paucity of incentives is already challenging the ability of all but deep-pocketed consumers to swing new vehicles. But a trend that began in 2022, and is forecast to continue this year may just send more financially-challenged shoppers looking to finance a new or used ride to the sidelines.
According to a study by Bankrate.com auto loan interest rates were blasted into an upward trajectory by the Federal Reserve’s actions raising interest rates at the fastest pace in 40 years in 2022 and continuing to rise this year.
“For auto loans the average new car loan rate rising to 6.9% by the end of the year and for used cars 7.75%,” said Greg McBride, Bankrate.com chief financial analyst, in an interview with Forbes.com. “For consumers with good credit…a very attainable rate. But if you have marginal or weak credit it’s a different ballgame. The credit will be tighter and rates will be considerably higher.”
Using another auto finance rate monitor, Cox Automotive Senior Economist Jonathan Smoke noted in his weekly market report, “The volume-loaded average new auto loan rate on Dealer Track in December increased another seven basis points and ended the year at 8.02% which was up just shy of three full percentage points from a year ago. The volume-weighted average used auto loan rate in December declined slightly to 12.37% which was up a bit more than three full percentage points from a year ago. That change in auto rates causes payments to increase by more than 12%.”
Indeed, car shoppers are caught in an environment of conflicting conditions. The Bankrate.com study cites Kelley Blue Book in pointing out although the average transaction price (ATP) in November reached a record $47,681, it was the first time since the summer of 2021 the ATP was actually lower than the average manufacturers suggested retail price (MSRP) for a vehicle.
While that may appear to show some sort of moderation in affordability, it’s a bit of a mirage.
In the Bankrate.com report McBride advised “For an explanation of why so many households are living paycheck to paycheck and have strained budgets, look no further than the driveway.”
In our interview with him, McBride explained that observation saying, “The average amount financed on a new car is $46,000. That’s not people buying used Toyota Corollas.There’s been an increasing appetite for larger and more expensive vehicles. The problem has mushroomed in the pandemic because inventory shortages pushed prices up a lot faster. It put people in a position where they’re having to borrow even more at a time when interest rates are rising.”
Those inventory shortages were exacerbated by production slowdowns caused by supply shortages, especially for semiconductor computer chips which operated myriad vehicle components and systems. With few cars and trucks on dealer lots to sell, automakers pulled back on cash and financing incentives, further challenging vehicle affordability for some.
“The share of new vehicle financing transactions featuring zero percent annual percentage rate fell to 4.7% in December which was a new pandemic low,” Cox Automotive’s Jonathan Smoke noted in his report.
As production and inventories slowly work their way towards pre-pandemic levels, automakers may, in turn, methodically loosen their grip on incentives, especially if consumers decide they’re not going to pay higher sticker prices, according to McBride.
He expects interest rates at banks that lend directly to consumers to level off later this year but advises consumers should shop around because there are deals out there.
“Yes, rates are rising but we see a big disparity in rates between lenders that are more competitive and those that are less competitive,” McBride pointed out. “Even for people with good credit. It’s a difference between paying 6% or 12%.”
He also suggests checking rates at credit unions which tend to be competitive for auto loans.
In the end, McBride warns consumers away from trying to time their decision to buy with expectations of when interest rates might be the most attractive, suggesting instead,“The decision that should be made based on when do you need a car, when are you in a financial position to be able to make that purchase.”