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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 has a specialization in helping readers to navigate the ins and outs of securely borrowing money to purchase an automobile.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers gain the confidence to manage their finances with precise, well-researched and well-researched content that breaks down otherwise complex topics into manageable bites.
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The last two years of prices for vehicles have been a rollercoaster ride for both the sellers and drivers. This summer was a record year for transactions, and an MSRP above $48,000, according to Kelley Blue Book (KBB) and then followed. Fortunately, prices for cars have been settling down this holiday season, since they hit their peak during the summer. But , at the same time -- interest rates have been increasing. The simultaneous rise in rates as well as a drop in cost has hampered any real gains for consumers. Rates of interest for new cars in October, up from 4.2 percent just one year ago, as per Edmunds data. This has compounded into a frustrating circumstance for drivers getting some relief over cost. With the prospect of an economic downturn is in the near future in the near future, it is essential to know how it could ripple down and impact the cost of owning the vehicle. Monthly payments are up 3% A driver's monthly installment is determined by a number of factors, like the vehicle 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 -which is currently set at 4.75-5 percent over the past year, the cost to borrow money has also increased. The result is that lenders have increased the price of finance. The more it costs for financing, the higher the interest rates, and the more expensive the monthly cost is. October set the record for monthly payments for new vehicles 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 a CoPilot study. Although the increase of 3.3 percent may appear small, it adds up to more than a thousand dollars during the . This result was not good for drivers who were finally feeling relief from declining costs for vehicles. Any savings could end up being offset with the rise in interest rates. Even if prices for car transactions are less expensive, the will still be much higher -- making it difficult for drivers to save in the beginning. Lower wholesale prices haven't been transferred to retail prices. Logic tells us that if wholesale prices are lower, then the price that consumers pay should be lower as well -- but unfortunately, that is not the case. Since the start of the year, wholesale prices have dropped more than 15 percent. But the average transaction price for cars is more expensive. This is primarily due to the continued need 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 more readily available does not mean drivers can afford the cost of buying them. For many drivers buying a car right now is not worth the cost. In October, as mentioned earlier, there were record-high monthly payments of almost $750 according to KBB. So, even though vehicles inventory increased, it remains low by the standards of historical precedent. This shortage of inventory means continued high prices in the retail industry. The rise in credit union car loans One reaction to high interest rates has driven some borrowers to finance with . The distinction between the credit union is dependent on the available money present. Credit unions are owned by members and not for profit which means they typically have low fees and less loan rate of interest. For the quarter that ended in 2022, Experian discovered that credit unions have been growing in market share over the last five years -- falling in line with the Fed increasing interest rates. Securing financing through credit unions is one way motorists are finding relief from this . The Fed's fight to quell inflation will not stop anytime soon The Federal Reserve walks a thin line between controlling inflation while ensuring that prices remain affordable for consumers. The auto market is one instance of an area which inflation isn't 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 the foreseeable future in both used and new markets," explains Cox Automotive Chief Economist Jonathan Smoke. "It's not the fault of the Fed but it will affect consumer access to transportation." KBB found an average wage earner must put in 40 weeks of work to finance a new vehicle. Such statistics, as Smoke points out, are making vehicle financing especially challenging for lower earners. "Higher rates have already shifted the availability of vehicles and financing to more wealthy consumers," he says. Limited access to vehicles also means that it is difficult for people to take the same actions they would have done in similarly challenging economic times. When we look back to 2008's recession, people were able to benefit from incentives for vehicles and the rush of dealers eager to sell. But with less inventory available and no relief offered to drivers. Two major reactions to the possibility of inflation continuing to rise are that the overall level of debt is increasing-- reflected in increased delinquency rates, and drivers who are experiencing higher the rate at which they are depreciating. Auto loan debt continues to grow. Overall loan balances have increased 8 percent between quarter one from 2021 to 2022 according to Experian. This feeds into the massive . In addition to general debt growth the amount of debt increased. In the second quarter of the year 2022, TransUnion found the following: 3.34 per cent of automobile loans were over 30 days in arrears. This is among the highest numbers of delinquency over the last couple of years. While it's true part of the reason is due to backlogged accounts after the pandemic, this increase is still notable particularly for subprime borrowers , who are most greatly affected. "Delinquencies remain at previous levels for the majority of credit products. However, the number of delinquencies has increased over the last year, especially among the subprime segment of consumers," notes Michele Raneri, vice president of U.S. research and consulting at TransUnion. It is also predicted that auto loan balances will exceed all remaining student loans in the first half of 2023, as per the Consumer Financial Protection Bureau. This increases the domino effect that actions from central banks Central Bank have on vehicle affordability. As delinquencies rise to pre-pandemic levels, it's crucial to know how rising rates of interest will make expensive -- increasing the chance of delinquency. Drivers are faced by a faster than normal depreciation of their vehicles On the top of the high cost of vehicles and interest rates, car owners will likely lose money in the next few months due to the faster depreciation rate of vehicles according to 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 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 all bad news for vehicle owners. "For at most the next year or so, the value of used vehicles likely won't fall back to what they were prior to the big runup over the past two years," Hoenig says. This is due mainly due to the fact that demand won't return to normal levels soon. Now may not be the best time to buy an automobile. The high costs of car ownership aren't the only cost that Americans are currently faced with. "Consumers are being pushed in a variety of ways in the current climate of high inflation and secondarily by the higher rates of interest is the Federal Reserve is implementing to reduce it," Raneri explains. Buying a vehicle could be among the most costly purchases individuals make. But with the high interest rates being a factor, patience could be a viable option. The reality of expensive prices is somewhat unavoidable but waiting for a big purchase like a car could save you money. If you do not have the privilege of waiting, prepare to spend more money and look into ways to save money when purchasing an automobile in .
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Writen by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers with the ways and pitfalls of using loans to buy the car they want.
Edited by 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 control their finances by providing precise, well-researched and well-documented data that breaks otherwise complicated subjects into digestible pieces.
Auto loans editor
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