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5 min 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 with the ins and outs of securely using loans to buy a car.

Editor: Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to control their finances through providing clear, well-researched information that breaks down complicated topics into digestible chunks.

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They ensure that what we write will ensure that our content is reliable, honest and reliable. The loans reporters and editors are focused on the things that consumers care about the most — the different types of lending options and the most competitive rates, the most reliable lenders, ways to pay off debt and much more. So you can feel confident when making your investment.

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The last 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, with an average MSRP above $48,000 according to Kelley Blue Book (KBB) and then followed. Thankfully, car prices have been settling down during the holiday season, following peak prices during the summer. But — simultaneously -the interest rates are rising. The simultaneous rise in rates and decrease in price has undermined any tangible wins for consumers. Interest rates for new vehicles in October, up from 4.2 percent just a year ago, according to Edmunds information. This has compounded into an unhappy situation for motorists getting some relief over cost. If the recession is looming in the near future, it is essential to be aware of how this could influence the monthly cost to own the vehicle. The monthly payments have increased by 3percent. A person’s monthly payments are based on several elements, such as the car as well as the loan period. But the cost is also dependent on the benchmark rate, set by the Federal Reserve, which auto lenders utilize to . As as the Fed rate has risen -currently at 4.75-5 percent over the past year the cost of borrowing money has also increased. The result is that lenders have increased their costs to finance. The more money you pay to borrow, the higher the interest rates and thus the more expensive the monthly cost is. October set the record for average monthly new vehicle payments of $748 as per KBB. While prices have decreased by nearly 5 percent the monthly payment is 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 result was not good for drivers who were finally experiencing relief from the decline in price of their vehicles. Any savings could end up being offset by interest rates increasing. Even if prices for car transactions are lower however, they will be much higher — making it impossible for drivers to in the beginning. Lower wholesale prices have not been transferred to retail prices. Logic tells us that If wholesale prices are less, then the price that consumers pay will follow However, that is not the situation. Since the beginning of the year wholesale prices have decreased by more than 15 percent. But the average transaction price for vehicles is still much more expensive. This is due in part to the constant demand for new cars. October saw the highest volume of new vehicle inventory since May of 2021. However, just because these vehicles are available more readily does not mean drivers can afford them. For many it is clear that the price to purchase currently 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, it remains low by the standards of historical precedent. The limited supply of vehicles results in continued high prices for the retail market. The rise in credit union car loans A reaction to the high interest rates has prompted some borrowers to finance with . The distinction between financing with a credit union is based on the amount of money available. Credit unions are member owned and are not profit-driven, meaning they generally have less fees and lower loan fees and interest. For the quarter that ended in the year 2022, Experian discovered that credit unions had been growing in market share in the last five years, while falling in with the Fed increasing interest rates. Securing financing through credit unions is only one of the ways drivers are finding relief in this . The fight of the Fed to curb inflation will not stop anytime soon The Federal Reserve walks a thin line between controlling inflation and ensuring affordable prices for consumers. The market for automobiles is an illustration of where inflation is not yet under control. And unfortunately the higher rates are expected to not 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 fault of the Fed however, it could impact consumer access to transportation.” KBB found an average earner would need to work over 40 weeks to pay off the purchase of a new car. Such statistics, as Smoke points out, are making vehicle financing especially challenging for lower earners. “Higher rates are already shifting access to vehicles and financing to wealthier customers,” he says. Limited access to vehicles also creates a challenge for consumers to react as they might have had to in similar challenging economic times. In the aftermath of the 2008 recession, drivers could benefit from incentives on vehicles as well as sales by dealers wanting to sell. But with less inventory available and no relief for drivers. Two of the main reasons for the possibility of inflation increasing are that the overall level of debt is increasingwhich is reflected in rising delinquency rates as well as drivers experiencing faster rates of depreciation. The amount of auto loan debt continues to grow. overall loan balances have increased by 8 percent between quarter one from 2021 to 2022 according Experian. This feeds into the massive . On top of overall growth in debt The number of borrowers is also increasing. For the quarter that ended in the year 2022, TransUnion found it was 3.34 percentage of car loans were over 30 days in arrears. This is one of the highest rates of delinquency in the past few years. Although it’s true that part of the reason is due to accounts that have been logged after the pandemic, this rise is nonetheless notable, especially for subprime borrowers , who are most greatly affected. “Delinquencies are in line with previous levels for the majority of credit products. However, levels have increased over the last year, especially among subprime consumer segments” states Michele Raneri, vice president of U.S. research and consulting at TransUnion. The forecast also predicts that auto loan balances will exceed any remaining student loans in the first half of 2023, according to the Consumer Financial Protection Bureau. This is a further confirmation of the effect of domino effects that decisions from the Central Bank have on vehicle affordability. Therefore, when delinquencies are returning to pre-pandemic levels, it’s essential to be aware of how the rising interest rates will continue to create a costly situation, thereby increasing the risk of delinquency. Drivers are confronted with a higher rate of depreciation than usual on in addition to the higher cost of cars as well as interest rate, drivers will likely lose money in the months ahead due to faster vehicle depreciation, says Henry Hoenig, data journalist for Jerry. The biggest influence in this situation comes from the time of year that people buy their cars. “People who bought used cars in the past year or two paid inflated prices,” Hoenig explains. The used car market is cooling, these motorists are the most at chance of experiencing rapid depreciation. However, it’s not the only bad news for vehicle owners. “For at most the next year or so, the value of used vehicles likely won’t fall back to the levels they were prior to the big runup over the last two years” Hoenig says. This is due in large part to the fact that demand won’t return to the normal levels anytime soon. This isn’t the right time to purchase cars. High costs for vehicles aren’t the only cost that Americans are currently being met with. “Consumers are under pressure by a myriad of factors, first by this environment of high inflation, and secondarily by the higher rates of interest is the Federal Reserve is implementing to reduce it,” Raneri explains. The purchase of a car can be one of the most expensive purchases many consumers make. And with the high interest rates being a factor, patience could be a successful strategy. The fact that prices are high is not a surprise, but waiting for a big purchase like a car could save you money. If you do not have the luxury of waiting for a car, be prepared to spend more money and consider tips to save when buying the car you want in .

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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 ways and pitfalls of taking out loans to purchase the car they want.

Editor: Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate from late 2021. They are dedicated to helping their readers to take control of their finances by providing concise, well-researched, and clear information that breaks down otherwise complicated topics into bite-sized pieces.

Auto loans editor

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