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5 minutes read. Published March 22, 2023
Writen 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 ways and pitfalls of using loans to buy an automobile.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since late 2021. They are committed to helping readers gain confidence to manage their finances with clear, well-researched information that breaks down otherwise complex subjects into bite-sized pieces.
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The past two years of prices for vehicles have been an up and down for both sellers and drivers. This summer saw record-high transaction prices and an MSRP of $48,000 according to Kelley Blue Book (KBB) and then followed. Fortunately, car prices are on the rise in the last few weeks, following the peak price of in the summer. But , at the same time -the interest rates are rising. The synchronized increase in rates and decrease in price has undermined any real gains for consumers. Rates of interest for new cars were up in October from 4.2 percent just a year ago, as per Edmunds information. This has created an unsettling situation for those who are finally feeling some relief from sticker price. If the recession is looming in the near future, it is essential to be aware of how this could ripple down and impact the monthly cost to own an automobile. The monthly payments have increased by 3.3%. The monthly payments are based on many elements, such as the car as well as the loan period. However, it is also dependent on the benchmark rate, which is set by the Federal Reserve, which auto lenders utilize to . Since as the Fed rate has risen -- currently set at 4.75-5 percent in the last year the cost of borrowing money has also increased. That means that lenders have increased their costs to finance. The more it costs for financing, the more the interest rates and thus the more expensive the monthly expense is. October set a record in the monthly average of new car payments costing $748 according to KBB. Although prices have dropped by almost 5 percent, monthly payments are up 3.3 percent, as per a CoPilot study. While this percent increase may appear small, it adds up to more than 1,000 dollars in the . This created an unfortunate outcome for those who were experiencing relief from the decline in vehicle prices. Any savings could end up being offset by the rising interest rates. Even if vehicle transaction prices are lower, the will still be much higher -- which makes it difficult for motorists to afford it in the first place. Lower wholesale prices haven't been translated into retail prices. Logic says that when wholesale prices are lower, then the price that consumers pay should be lower as well however, that is not the scenario. Since the beginning of the year wholesale prices have decreased by over 15 percent. But the average transaction price for vehicles remains more expensive. This is mostly due to the continued demand for new cars. October saw the highest volume of inventory of new vehicles since the month of May 2021. However, just because these vehicles are available more readily does not mean that people can afford them. For many drivers it is clear that the price to purchase today isn't worth the cost. As mentioned, October set records for monthly payments, which topped $750 according to KBB. So, even though vehicles inventory increased but it's still low by norms of the past. This shortage of inventory means continued high prices for the retail market. A rise in credit union auto loans Another reaction to rising interest rates has driven some borrowers to borrow with . The distinction between financing through a credit union is based on the cash available. Credit unions are owned by members and are not for profit which means they typically have low fees and less loan interest rates. The second quarter ended 2022 Experian discovered that credit unions had been growing in market share in the last 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 drivers are finding relief in this . The Fed's fight to quell inflation will not end anytime soon The Federal Reserve walks a thin line between regulating inflation and maintaining accessible prices for consumers. The auto market is a prime illustration of which inflation isn't yet under control. And, unfortunately the higher rates are not expected to go away anytime soon. "Affordability is going to be a challenge for the foreseeable future in both new and used markets," explains Cox Automotive Chief Economist Jonathan Smoke. "It's not the fault of the Fed however, it could impact the access of consumers to transportation." KBB found an average earner would need to work over 40 weeks to repay an automobile. Statistics like these, Smoke notes, are making the financing of vehicles particularly difficult for people with lower earnings. "Higher rates are already shifting access to cars and financing to more wealthy consumers," he says. Limited access to vehicles also creates a challenge for consumers to respond as they might have had to in similar difficult economic times. In the aftermath of the 2008 recession, people were able to benefit from vehicle incentives and the rush of dealers wanting to sell. However, with fewer inventory options and no relief provided to motorists. Two of the main reasons for the possibility of inflation increasing are overall debt growing --- reflected in rising delinquency rates as well as drivers experiencing faster the rate at which they are depreciating. The amount of auto loan debt continues to grow. In total loan balances have grown 8 percent from quarter one from 2021 to 2022 according Experian. This feeds into the massive . Alongside the overall growth in debt, the number of increased. The second quarter in 2022, TransUnion found that 3.34 percentage of car loans were more than 30 days late. This is one of the highest numbers of delinquency over the last couple of years. While it's true part of the reason is due to accounts that have been logged after the pandemic, this growth is still noteworthy particularly for subprime borrowers who are the most affected. "Delinquencies are 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" notes Michele Raneri, vice president of U.S. research and consulting at TransUnion. The forecast also predicts that auto loan balances will exceed all remaining student loans within the first quarter of 2023, according to the Consumer Financial Protection Bureau. This is a further confirmation of the effect of domino effects that decisions from central banks Central Bank have on vehicle affordability. Therefore, when delinquencies are returning to pre-pandemic levels, it is crucial to know how rising rates of interest will make expensive -- increasing the risk of delinquency. Drivers are confronted by a faster than normal depreciation of their vehicles On top of high vehicle cost and interest rates, motorists are likely to lose money over the months ahead due to the faster depreciation rate of vehicles, says Henry Hoenig, data journalist for Jerry. The biggest influence in this situation comes from the timing of when drivers purchase their vehicles. "People who bought used vehicles in the past year or two were charged exorbitant price," Hoenig explains. As the used car market is cooling, these motorists are the most at risk of rapid depreciation. However, it's not all bad news for car owners. "For at least the next year or so, the value of used vehicles are unlikely to fall back to what they were prior to the big runup over the last two years" Hoenig says. This is due mainly because the supply won't return to normal levels within the next few months. Now may not be the ideal time to purchase an automobile. The high costs of car ownership aren't the only cost that Americans are currently faced with. "Consumers are being pressured in a variety of ways, first by this environment of high inflation, and secondarily by the higher rates of interest that is the Federal Reserve is implementing to reduce it," Raneri explains. Buying a vehicle can be one of the most expensive purchases many consumers make. And with steep interest rates being a factor, patience could be a successful strategy. The reality of expensive prices is somewhat unavoidable but waiting for a big purchase like a vehicle can mean money saved. If you don't have the privilege of waiting for a car, be prepared to spend more money and think about ways to save when buying a car in a .
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Authored by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers to navigate the ins and outs of securely 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 dedicated to helping their readers gain the confidence to manage their finances by providing clear, well-researched facts that break down complicated subjects into digestible pieces.
Auto loans editor
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