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5 minutes read. Released March 22, 2023

Written by Rebecca Betterton Written by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers with the details of taking out loans to buy a car.

The edit was done by 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 clear, well-researched information that breaks down complicated subjects into bite-sized pieces.

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The last two years of vehicle prices have been a rollercoaster for both the sellers and drivers. This summer saw record-high price transactions with an average MSRP of $48,000, as per Kelley Blue Book (KBB) and it followed. Thankfully, car prices have been leveling in the last few weeks, following the peak price of during the summer. But — simultaneously — interest rates have been increasing. The synchronized increase in rates as well as a drop in cost has hampered any positive outcomes for consumers. The interest rates for new cars in October, up from 4.2 percent just a year ago, as per Edmunds data. This has led to a frustrating circumstance for drivers getting some relief over cost. If the recession is looming and is a possibility, it is crucial to know how it could affect the cost of owning the vehicle. Monthly payments are increasing by 3.3%. The monthly payments are based on several elements, such as the car and loan duration. However, the price is affected by the benchmark rate, set by the Federal Reserve, which auto lenders use to . Since it has been observed that the Fed rate has risen — currently set at 4.75-5 percent — in the last year the cost of borrowing money has also increased. This means lenders have increased their costs to finance. The more money you pay to finance, the greater the interest rates, and the higher the monthly cost is. October set the record for monthly payments for new vehicles costing $748 according to KBB. While prices have decreased by almost 5 percent the monthly payment is up 3.3 percent, as per an CoPilot study. Although the increase of 3.3 percent may seem small, it’s actually amounted to over 1,000 dollars in the . This result was not good for motorists who were feeling relief from declining costs for vehicles. Any savings could end up being wiped out by the rising interest rates. Even if the prices for vehicle transactions are more accessible but they’ll still be higher, making it impossible for drivers to in the first place. Lower wholesale prices have not been transferred to retail prices. Logic says that if wholesale prices are lower then the price consumers pay will follow however, that is not the scenario. Since the beginning of the year, wholesale prices have dropped over 15 percent. But the average transaction price for cars is more expensive. This is primarily due to the constant demand for new vehicles. October saw the highest volume of inventory of new vehicles since the beginning of May in 2021. However, just because these vehicles are more readily available does not mean drivers can afford them. For many drivers it is clear that the price to purchase today isn’t worth the cost. As mentioned, October set record-high monthly payments of almost $750 according to KBB. Also, even though the vehicles inventory increased, it remains low by norms of the past. This shortage of inventory means continued high prices in the retail sector. The rise in credit union car loans A reaction to the high interest rates has led certain borrowers to take out loans using . The distinction between financing with a credit union is based on the cash available. Credit unions are owned by members and are not profit-driven that means they typically have less fees and lower loan fees and interest. The second quarter ended 2022, Experian discovered that credit unions had trended up in market share over the last five years — falling in with the Fed raising interest rates. Credit unions are a great source of financing. is only one of the ways motorists are finding relief from this . The Fed’s fight to quell inflation is not going to end anytime soon The Federal Reserve walks a thin line between regulating inflation and ensuring affordable prices for consumers. The auto market is a prime example of the areas where inflation isn’t at a level that is under control. And unfortunately these rates are not expected to be going away any time soon. « Affordability will be challenged for the foreseeable future in both the used and new markets, » explains Cox Automotive Chief Economist Jonathan Smoke. « It’s not the Fed’s fault, but it will impact the access of consumers to transportation. » KBB found an average wage earner must put in 40 weeks of work to finance a new vehicle. Statistics like these, Smoke notes, are making vehicle financing especially challenging for people with lower earnings. « Higher rates have already shifted access to cars and financing to wealthier customers, » he says. Access to cars is also a problem that makes it challenging for consumers to respond as they might have had to in similar difficult economic times. Looking back to the 2008 recession, drivers could benefit from vehicle incentives and an influx of dealerships looking to sell. But with less inventory available and less incentive for drivers. Two main reactions to the possibility of inflation rising is that overall debt is growingwhich is reflected in increased delinquency rates, and drivers who are experiencing higher the rate at which they are depreciating. The amount of auto loan debt continues to increase Overall loan balances have grown 8 percent between quarter one of 2021 until 2022 according to Experian. This feeds into the staggering . Alongside the overall growth in debt the amount of debt increased. For the quarter that ended in 2022 TransUnion discovered the following: 3.34 per cent of automobile loans were over 30 days in arrears. This is one of the highest delinquency numbers in the past couple of years. Although it’s true that part of the reason is due to backlogged accounts due to the pandemic, the growth is still noteworthy, especially for subprime borrowers who are the most severely affected. « Delinquencies remain 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 balances will surpass any remaining student loans in the first quarter of 2023, as per the Consumer Financial Protection Bureau. This reinforces the domino effect that moves from Central Bank actions Central Bank have on vehicle affordability. As delinquencies rise to pre-pandemic levels, it’s essential to be aware of how the rising rates of interest will create a costly situation, thereby increasing the likelihood of delinquency. Drivers are confronted by a faster than normal depreciation of their vehicles On top of high vehicle cost along with interest costs, car owners are likely to lose money in the coming months due to faster vehicle depreciation as per Henry Hoenig, data journalist for Jerry. The biggest influence in this situation comes down due to the timing of when drivers purchase their vehicles. « People who bought used cars in the past year or two were charged exorbitant prices, » Hoenig explains. In the event that the market for used cars cools these drivers are most at risk of rapid depreciation. However, this isn’t all bad news for car owners. « For at least the next year or so used vehicle values will likely not fall to the levels they were prior to the huge run-up in the last two years » Hoenig says. This is due in large part because supply will not return to its the normal levels anytime within the next few months. It’s not the best time to buy an automobile. The high costs of car ownership are not the only expense that Americans are being afflicted with. « Consumers are being pressured in a variety of ways due to the present situation 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 could be among the biggest expenditures people make — and with steep interest rates it is possible to be a winning strategy. The reality of expensive prices is not a surprise, but waiting to make a large purchase like a vehicle can result in savings. If you don’t have the privilege of waiting make sure you are prepared to pay more and think about ways to save when buying a car in a .


Authored 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 the car they want.

Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers gain the confidence to manage their finances with clear, well-researched facts that break down otherwise complicated topics into bite-sized pieces.

Auto loans editor

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