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5 min read Released March 22, 2023

Authored by Rebecca Betterton 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 taking out loans to buy the car they want.

Edited 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 through providing precise, well-researched and well-researched content that break down complex topics into manageable bites.

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The past two years of car prices have been a rollercoaster for both sellers and drivers. This summer saw record-high transactions, with an average MSRP above $48,000, as per Kelley Blue Book (KBB) and then followed. Fortunately, car prices have been settling down during the holiday season, following the peak price of during the summer. However, simultaneouslythe interest rates are increasing. The synchronized increase in rates and a decrease in prices has degraded any positive outcomes for consumers. Rates of interest for new cars increased in October to 4.2 percent just one year ago, as per Edmunds information. This has led to an unsettling situation for those getting some relief over the sticker price. As the possibility of the recession is looming and is a possibility, it is crucial to be aware of how this could ripple down and impact the monthly cost of owning an automobile. Monthly payments are increasing by 3.3%. The monthly payment is based on many factors, like the vehicle as well as the loan period. However, the price is affected by the benchmark rate set by the Federal Reserve, which auto lenders use to . Since as the Fed rate has increasedcurrently at 4.75-5 percent — in the last year, the cost to borrow money has followed. That means that lenders have increased the cost to finance. The more money you pay to finance, the higher the interest rates and thus the more expensive the monthly expense is. October set a record for the monthly average of new car payments that cost $748, according to KBB. Although prices have dropped by nearly 5 percent and monthly payments have increased by 3.3 percent, as per an CoPilot study. Although the increase of 3.3 percent may appear small, it adds up to more than 1,000 dollars in the . This was a disastrous outcome for motorists who were experiencing relief from the decline in vehicle prices. The savings that could be made are being offset by interest rates increasing. Even if vehicle transaction prices are more accessible however, they will be much higher — making it difficult for drivers to in the beginning. Lower wholesale prices have not been reflected over to retail Logic says that If wholesale prices are less then the price consumers pay will follow — but unfortunately, that is not the scenario. Since the start of the year wholesale prices have fallen over 15 percent. But the average transaction price for cars is higher. This is mostly due to the continuing demand for new vehicles. October saw its highest level of new-vehicle inventory since the month of May 2021. But just because the cars are available more readily does not mean that people can afford them. For many drivers, the cost to buy currently isn’t worth it. As mentioned, October set record-high monthly payments of almost $750, according KBB. Therefore, even though automobile inventory rose, it remains low by the standards of historical precedent. This limited available supply means continued high prices for the retail market. A rise in credit union auto loans One reaction to high interest rates has led certain borrowers to take out loans using . The difference with financing with a credit union is determined by the cash available. Credit unions are owned by members and not for profit, meaning they generally have low fees and less loan interest rates. For the quarter that ended in 2022, Experian found credit unions have trended up in market share over the past five years, but have fallen in line with the Fed raising interest rates. Credit unions are a great source of financing. is just one way that drivers are finding relief in this . The fight of the Fed to curb inflation is not going to end anytime soon The Federal Reserve walks a thin line between controlling inflation while ensuring that prices remain affordable for consumers. The auto market is a prime example of the areas where inflation isn’t in control. And unfortunately the higher rates are not expected to go away anytime soon. “Affordability is going to be a challenge for years to come in both the used and new market,” explains Cox Automotive Chief Economist Jonathan Smoke. “It’s not the fault of the Fed, but it will impact consumer access to transportation.” KBB found an average wage earner must spend 40 weeks working to pay off a new vehicle. Such statistics, as Smoke points out, are making car financing particularly difficult for lower earners. “Higher rates are already shifting access to vehicles and financing towards wealthier consumers,” he says. The lack of access to vehicles makes it challenging for consumers to respond as they would have done in similarly difficult economic times. When we look back to 2008’s recession, consumers could benefit from incentives on vehicles as well as the rush of dealers eager to sell. But with less inventory available and less incentive for drivers. Two major reactions to the probability of inflation rising are that the overall level of debt is increasing– reflected in higher delinquency rates and drivers who are experiencing higher rates of depreciation. The amount of auto loan debt continues to grow. Overall loan balances have grown 8 percent between quarter one of 2021 until 2022 according Experian. This is reflected in the huge . In addition to overall debt growth, the number of has also seen a jump. The second quarter in the year 2022, TransUnion found the following: 3.34 percent of auto loans were more than 30 days delinquent. This is among the highest delinquency numbers in the past few years. Although it’s true that some of this is due to accounts that have been logged due to the pandemic, the increase is still notable particularly for subprime borrowers , who are the most severely affected. “Delinquencies remain at previous levels for the majority of credit products. However, the number of delinquencies has been rising over the past year, especially in the subprime segment of consumers,” states Michele Raneri, vice president of U.S. research and consulting at TransUnion. The forecast also predicts that auto loan balances will surpass the remaining balance of student loans in the first half of 2023, as per the Consumer Financial Protection Bureau. This reinforces the domino effect that moves made by central banks Central Bank have on vehicle affordability. As delinquencies rise to pre-pandemic levels, it is important to understand how increasing interest rates will continue to create a costly situation, thereby increasing the risk of delinquency. Drivers are being met with a higher rate of depreciation than usual on the top of the high cost of vehicles along with interest costs, drivers are likely to lose money over the coming months due to the faster depreciation rate of vehicles, 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 vehicles within the last year or two were charged exorbitant prices,” Hoenig explains. As the used car market gets cooler, these buyers are most at chance of experiencing rapid depreciation. But it is not all bad news for vehicle owners. “For at least the next year or so used vehicle values are unlikely to fall back to the levels they were prior to the massive increase over the past two years,” Hoenig says. This is due because demand isn’t expected to return to normal levels soon. It’s not the best time to buy cars. High costs for vehicles aren’t the only expenses that Americans are being afflicted with. “Consumers are under pressure in a variety of ways due to the present environment of high inflation, as well as by the higher rates of interest the Federal Reserve is implementing to tamp it down,” Raneri explains. Buying a vehicle could be among the most costly purchases people make — and when interest rates are high, patience may be a successful strategy. The fact that prices are high is somewhat unavoidable however, waiting for a major purchase like a vehicle can mean money saved. If you do not have the luxury of waiting for a car, be prepared to pay more and consider tips to save money when purchasing a car in a .


Written by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers in navigating the details 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 late 2021. They are dedicated to helping their readers gain the confidence to take control of their finances with clear, well-researched facts that break down otherwise complicated subjects into digestible pieces.

Auto loans editor

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