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How steep interest rates have negated steadying car prices Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial choices by offering you interactive tools and financial calculators that provide objective and original content, by enabling you to conduct research and compare information for free and help you make sound financial decisions. Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The offers that appear on this website are provided by companies that compensate us. This compensation can affect the way and where products are displayed on the site, such as such things as the order in which they appear within the listing categories, except where prohibited by law. Our loans, mortgages,, and other products for home loans. This compensation, however, does not influence the information we provide, or the reviews you read on this site. We do not include the entire universe of businesses or financial deals that may be available to you.



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10'000 Hours/Getty Images
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 with the ways and pitfalls of using loans to buy the car they want.







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 committed to helping readers gain confidence to control their finances through providing concise, well-studied information that break down complex subjects into bite-sized pieces.









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The last two years of vehicle prices have been a rollercoaster ride for both drivers and sellers. This summer was a record year for price transactions that averaged over $48,000, as per Kelley Blue Book (KBB) and it followed. Fortunately, car prices have been leveling this holiday season, since they hit their peak during the summer. However, simultaneouslyinterest rates have been on the rise. The simultaneous rise in rates and decrease in price has undermined any tangible wins for consumers. The interest rates for new cars were up in October from 4.2 percent just one year ago, according to Edmunds data. This has led to a frustrating circumstance for drivers getting some relief over the sticker price. With the prospect of the recession is looming in the near future, it is essential to understand how can influence the monthly cost of owning an automobile. Monthly payments are increasing by 3percent. A person's monthly payments are based on many variables, including the car, and the loan duration. However, it is also affected by the benchmark rate, set by the Federal Reserve, which auto lenders use to . As the Fed rate has increasedwhich is currently set at 4.75-5 percent in the last year, the cost to borrow money has also increased. That means that lenders have increased the price of finance. The more you spend for financing, the greater the interest rates, and the higher the monthly cost is. October set the record for the monthly average of new car payments of $748 as per KBB. Even though prices have fallen by nearly 5 percent the monthly payment is up 3.3 percent, as per an CoPilot study. Although this increase might appear small, it adds up to more than 1,000 dollars in the . This result was not good for motorists who were experiencing relief from the decline in costs for vehicles. The savings that could be made are being offset by interest rates increasing. Even if vehicle transaction prices are more accessible, the will still be higher, making it difficult for drivers to save 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 consumers pay will follow -- but unfortunately, that is not the case. Since the beginning of the year wholesale prices have decreased by over 15 percent. But the average cost of transactions for cars is higher. This is due in part to the constant demand for new cars. October saw the highest volume of inventory of new vehicles since the month of May 2021. But just because the cars are readily available doesn't mean that drivers are able to afford the cost of buying them. For many it is clear that the price to purchase right now is not worth it. As mentioned, October set record-high monthly payments of almost $750, according to KBB. So, even though automobile inventory rose however, it is still low according to historical standards. This limited available supply means continued high prices in the retail industry. Increase in credit union car loans One reaction to high interest rates has prompted some borrowers to borrow with . The difference with the credit union is determined by the amount of money available. Credit unions are owned by members and are not profit-driven, meaning they generally have low fees and less loan fees and interest. The second quarter ended 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 raising interest rates. Credit unions are a great source of financing. is one way 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 regulating inflation and ensuring affordable prices for consumers. The market for automobiles is an illustration 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 in doubt for the foreseeable future in both the new and used markets," explains Cox Automotive Chief Economist Jonathan Smoke. "It's not the Fed's fault however, it could impact the access of consumers to transportation." KBB found an average wage earner must put in 40 weeks of work to pay off an automobile. Statistics like these, Smoke points out, are making the financing of vehicles particularly difficult for people with lower earnings. "Higher rates are already shifting access to vehicles and financing to more wealthy consumers," he says. The lack of access to vehicles creates a challenge for people to take the same actions they would have done in similarly difficult economic times. Looking back to the 2008 recession, consumers enjoyed the benefits of incentives for vehicles and sales by dealers looking to sell. However, with fewer inventory options and less incentive for drivers. Two of the main reasons for the probability of inflation rising are overall debt growing --- reflected in rising delinquency rates as well as drivers who are experiencing higher rates of depreciation. The amount of auto loan debt continues to grow. overall loan balances have increased by 8 percent in the first quarter of 2021 to 2022, according Experian. This feeds into the staggering . On top of overall debt growth The number of borrowers increased. In the second quarter of 2022, TransUnion found it was 3.34 per cent of automobile loans were over 30 days in arrears. This is one of the highest delinquency numbers in the last couple of years. Although it's true that part of the reason is due to accounts that have been logged following the pandemic, this growth is still noteworthy particularly for subprime borrowers , who are most greatly affected. "Delinquencies are in line with previous levels for the majority of credit products. However, levels have been rising over the past year, especially in subprime consumer segments," notes Michele Raneri, vice president of U.S. research and consulting at TransUnion. The forecast also predicts that auto loan balances will exceed the remaining balance of student loans in the first quarter of 2023, according to the Consumer Financial Protection Bureau. This reinforces the domino effect that moves by the Central Bank have on vehicle affordability. Therefore, when delinquencies are returning to pre-pandemic levels, it is important to understand how increasing rates of interest will make expensive -- increasing the chance of delinquency. Drivers are faced with a higher rate of depreciation than usual on the top of the high cost of vehicles along with interest costs, motorists are likely to lose money over the next few months because of the speedier depreciation of their vehicles, says Henry Hoenig, data journalist for Jerry. The biggest influence in this situation comes down to the time of year that the owners purchase their cars. "People who purchased used cars within the last year or two have paid exorbitant prices," Hoenig explains. The used car market gets cooler, these buyers are the most at risk of rapid decline. But it is not all bad news for car owners. "For at most the next year or so, used vehicle prices likely won't fall back to what they were prior to the massive increase over the past two years," Hoenig says. This is due in large part to the fact that the supply isn't expected to return to the normal levels anytime in the near future. Now may not be 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 environment of high inflation, and secondarily by the higher rates of interest are being imposed by the Federal Reserve is implementing to tamp it down," Raneri explains. The purchase of a car could be among the biggest expenditures people make -- and when interest rates are high being a factor, patience could be a viable option. The fact that prices are high is perhaps inevitable, but waiting to make a large purchase like a car could save you money. 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 .


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Written by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers with the ways and pitfalls of taking out loans to purchase a car.



Editor: Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate since late 2021. They are dedicated to helping their readers to control their finances with precise, well-researched and well-documented information that breaks down complex topics into manageable bites.






Auto loans editor




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