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5 min read Released March 22, 2023
Writen by Rebecca Betterton 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 using loans to buy a car.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since the end of 2021. They are committed to helping readers gain the confidence to manage their finances through providing concise, well-studied information that breaks down otherwise complex topics into manageable bites.
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The past two years of prices for vehicles have been an up and down for both the sellers and drivers. This summer was a record year for transactions, that averaged of $48,000 according to Kelley Blue Book (KBB) and followed suit. Fortunately, car prices have been leveling in the last few weeks, following the peak price of during the summer. But -- simultaneously -the interest rates are rising. This synchronous increase in rates as well as a drop in cost has hampered any tangible wins for consumers. Interest rates for new vehicles increased in October to 4.2 percent just a year ago, as per Edmunds data. This has created an unhappy situation for motorists finally feeling some relief on sticker price. If the recession is looming and is a possibility, it is crucial to be aware of how this could influence the monthly cost to own an automobile. Monthly payments are increasing by 3.3%. The monthly payment is based on many elements, such as the car and loan duration. However, it is also affected by the benchmark rate, which is set by the Federal Reserve, which auto lenders utilize to . Since as the Fed rate has increased -currently at 4.75-5 percent -- over the past year the cost of borrowing money has followed. The result is that lenders have increased the price of finance. The more money you pay to finance, the greater the interest rates and the more expensive the monthly expense is. October set a record in average monthly new vehicle payments that cost $748, according to KBB. Even though prices have fallen by almost 5 percent the monthly payment is up 3.3 percent, as per an CoPilot study. Although this increase might seem slight, it amounts to over 1,000 dollars in the . This result was not good for drivers who were finally experiencing relief from the decline in costs for vehicles. Any money potentially saved is being offset by the rising interest rates. Even if the prices for vehicle transactions are more accessible however, they will be much higher -- which makes it difficult for motorists to afford it in the first place. Lower wholesale prices have not been translated into retail prices. Logic suggests that If wholesale prices are less, then the price that consumers pay should be lower as well However, that is not the case. Since the beginning of the year wholesale prices have fallen over 15 percent. However, the average price for vehicles is still much higher. This is mostly due to the continued need for new cars. October saw the highest volume of new vehicle inventory since the month of May 2021. But just because the vehicles are available more readily does not mean that people can afford the cost of buying them. For many drivers it is clear that the price to purchase today isn't worth it. As mentioned, October set record-high monthly payments of almost $750, according to KBB. Therefore, even though automobile inventory rose however, it is still low according to historical standards. This shortage of inventory results in continued high prices in the retail industry. A rise in credit union auto loans A reaction to the high interest rates has driven certain borrowers to take out loans using . The difference with financing through a credit union is determined by the cash available. Credit unions are owned by members and are not profit-driven, meaning they generally have lower fees and lower loan interest rates. For the quarter that ended in 2022 Experian discovered that credit unions had increased their 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 Federal Reserve's battle to stop inflation is not going to end anytime soon. Federal Reserve walks a thin line between regulating inflation and ensuring affordable prices for consumers. The market for automobiles is an illustration of where inflation is not yet under control. And, unfortunately, these higher rates are likely to disappear anytime in the near future. "Affordability is going to be a challenge for a long time to come in both 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 earner would need to put in 40 weeks of work to repay a new vehicle. These kinds of statistics, Smoke says, make car financing particularly difficult for people with lower earnings. "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 people to take the same actions they might have had to in similar difficult economic times. Looking back to the 2008 recession, consumers enjoyed the benefits of incentives on vehicles as well as the rush of dealers wanting to sell. But with less inventory available, there is no relief for drivers. Two of the main reasons for the likelihood of inflation rising are that the overall level of debt is increasingthat is evident in the increased delinquency rates, and drivers experiencing faster the rate at which they are depreciating. Auto loan debt continues to grow. overall loan balances have increased by 8 percent in the first quarter of 2021 to 2022, according to Experian. This is reflected in the huge . In addition to overall debt growth, the number of is also increasing. In the second quarter of 2022 TransUnion discovered that 3.34 percentage of car loans were over 30 days in arrears. This is among the highest delinquency numbers in the past couple of years. While it's true some of this is due to the backlog of accounts after the pandemic, this increase is still notable especially for subprime borrowers who are most greatly affected. "Delinquencies are in line with previous levels for the majority of credit products. However, the number of delinquencies has been rising over the past year, especially in 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 half of 2023, as per the Consumer Financial Protection Bureau. This increases the domino effect that moves from Central Bank actions Central Bank have on vehicle affordability. So, as delinquencies return to pre-pandemic levels, it's essential to be aware of how the rising interest rates will continue to make expensive -- increasing the likelihood of delinquency. Drivers are being met by a faster than normal depreciation of their vehicles On the top of the high cost of vehicles along with interest costs, motorists will likely 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 down to the time of year that drivers purchase their vehicles. "People who purchased used cars within the last year or two were charged exorbitant prices," Hoenig explains. The used car market cools these drivers are most at risk of rapid decline. However, it's not all bad news for car owners. "For at least the next year or so, used vehicle prices are unlikely to fall back to the levels they were prior to the big runup over the last two years," Hoenig says. This is due mainly to the fact that supply will not return to its regular levels anytime soon. It's not the right time to purchase a car High vehicle costs aren't the only expenses that Americans are being afflicted with. "Consumers are under pressure on multiple fronts due to the present environment of high inflation, and secondarily by the higher rates of interest that are being imposed by the Federal Reserve is implementing to reduce it," Raneri explains. Buying a vehicle is among the most expensive purchases many people make -- and with the high interest rates being a factor, patience could be a successful strategy. The fact that prices are high is somewhat unavoidable however, waiting for a major purchase like a car could save you money. If you do not have the luxury of waiting, prepare to pay more 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 is a specialist in helping readers to navigate the ways and pitfalls of using loans to buy an automobile.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers to manage their finances with precise, well-researched and well-documented facts that break down otherwise complicated topics into bite-sized pieces.
Auto loans editor
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