- High interest rates are hitting car buyers just as vehicles are becoming more available.
- Parts shortages have made it an expensive nightmare to buy a car for much of the pandemic.
- The Federal Reserve raised interest rates again on Wednesday by .75% to TK
With more cars to choose from on dealership lots, things are getting a bit easier for U.S. consumers after years of chaos in the auto market.
But climbing interest rates are throwing a wrench in the cogs.
According to Edmunds, the average annual percentage rate (APR) on new-vehicle loans rose from 4.2% last October to 6.3% today, hiking the typical monthly payment from $655 to $703 along with it. On the secondhand market, rates jumped from 7.4% to 9.6% and monthly payments from $520 to $564.
The last time APR for used cars surpassed 9.6% was in early 2010, according to Edmunds. But back then, the average amount financed for a secondhand purchase was $17,282. In October it was nearly double, at $30,707.
The Federal Reserve has hiked interest rates several times this year — most recently on Wednesday — with the intention of cooling spending and taming record-high inflation. The result is that car shoppers now need to stomach not only an inflated asking price, but also gobs of interest on top.
“New vehicle inventory might finally be improving, but the automotive industry is still on a long road to recovery because rising interest rates are creating a major barrier to entry for car shoppers,” Jessica Caldwell, executive director of insights at Edmunds, said in an email.
Vehicle prices have surged over the last two years as manufacturers struggled with parts shortages, leaving dealers with a dwindling supply of cars to sell. Inventories have slowly recovered this year, finally giving buyers more cars to choose from just in time for higher interest rates to create a new hurdle.
“New cars may finally become more available just when most Americans can no longer afford them,” Cox chief economist Jonathan Smoke said in an October note.
Although cars are still absurdly expensive compared to before the pandemic and are expected to stay pricy for the foreseeable future, there are signs that the market is cooling off. Caldwell told Insider that a rising supply of new vehicles will bring prices down for both used and new models, but improvement will be slow-going.
The average transaction price for a new car fell slightly in September to around $48,000 after five straight months of increases, according to Kelley Blue Book. Mike Manley, CEO of AutoNation, the largest dealership chain in the US, recently told investors that he expects used-vehicle values to decline as high interest rates keep some buyers out of the market.
If the Fed’s balancing act works out, all sorts of goods — including cars — should eventually become a bit more affordable. (Even if car companies and dealerships would rather keep the high prices and fat profits rolling.)
Until then, Caldwell advises shoppers to look for financing deals and seek out shorter loan terms. Although shorter terms come with higher monthly payments, they are well worth it in the long run for the lower total interest, she said.
Source: www.autoblog.com