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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 aim is to assist you make better financial decisions by offering interactive tools and financial calculators that provide objective and original content, by enabling you to conduct research and compare data for free to 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 deals that are displayed on this site are from companies who pay us. This compensation could affect how and where products appear on this site, including for instance, the order in which they may appear in the listing categories and other categories, unless prohibited by law. This applies to our mortgage, home equity, and other products that lend money to homeowners. But this compensation does have no impact on the information we publish, or the reviews that you see on this site. We do not include the vast array of companies or financial deals that may be available to you.



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5 minutes read. Published March 22, 2023
Written 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 taking out loans to buy an automobile.







Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to control their finances by providing concise, well-studied information that break down complex topics into manageable bites.









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The last two years of car prices have been an up and down for both drivers and sellers. This summer saw record-high transaction prices and an MSRP above $48,000 according to Kelley Blue Book (KBB) and it followed. Fortunately, car prices have been settling down in the last few weeks, following the peak price of during the summer. However, simultaneouslyinterest rates have been on the rise. This synchronous increase in rates and decrease in cost has hampered any tangible wins for consumers. The interest rates for new cars increased in October to 4.2 percent a year ago, as per Edmunds data. This has created an unsettling situation for those getting some relief over the sticker price. As the possibility of an economic downturn is in the near future and is a possibility, it is crucial to know how it could ripple down and impact the monthly cost to own an automobile. Monthly payments are up 3percent. A person's monthly payment is based on many elements, such as the car, and the loan period. But the cost is also affected by the benchmark rate set by the Federal Reserve, which auto lenders utilize to . Since the Fed rate has risen -which is currently set at 4.75-5 percent in the last year, the cost to borrow money has also increased. The result is that lenders have increased their costs to finance. The more you spend to borrow, the more the interest rates and thus the more expensive the monthly cost is. October set a record for monthly payments for new vehicles of $748 as per KBB. Although prices have dropped by almost 5 percent the monthly payment is up 3.3 percent, according to a CoPilot study. Although the increase of 3.3 percent may seem small, it's actually amounted to more than a thousand dollars during the . This result was not good for drivers who were finally feeling relief from declining vehicle prices. Any money potentially saved is being offset with the rise in interest rates. Even if prices for car transactions are less expensive however, they will be much higher -- making it impossible for motorists to afford it in the first place. Lower wholesale prices have not been transferred to retail prices. Logic suggests that If wholesale prices are less then the price the consumer pays should follow -- but unfortunately it's not the situation. Since the start of the year, wholesale prices have dropped more than 15 percent. However, the average price for vehicles is still much more expensive. This is due in part to the continued demand for new vehicles. October saw its highest level of inventory of new vehicles since the beginning of May in 2021. However, just because these vehicles are available more readily doesn't mean that drivers are able to afford them. For many drivers buying a car right now is not worth it. As we've mentioned, October saw record-breaking monthly payments of nearly $750, according KBB. Therefore, even though vehicle inventory showed a bump however, it is still low according to historical standards. The limited supply of vehicles results in continued high prices in the retail sector. Increase in credit union car loans One reaction to high interest rates has driven some borrowers to finance with . The distinction between the credit union is dependent on the amount of money available. Credit unions are owned by members and not for profit that means they typically have less fees and lower loan fees and interest. The second quarter ended the year 2022, Experian discovered that credit unions have trended up in market share over the last five years -- falling in line with the Fed increasing interest rates. The ability to get financing through credit unions is just one way that motorists are finding relief from this . The Federal Reserve's battle to stop inflation is not going to end anytime soon The Federal Reserve walks a thin line between regulating inflation while ensuring that prices remain affordable for consumers. The market for automobiles is an example of which inflation isn't yet in control. And, unfortunately the higher rates are expected to not go away anytime soon. "Affordability is going to be a challenge for a long time to come in both used and new market," explains Cox Automotive Chief Economist Jonathan Smoke. "It's not the fault of the Federal Reserve but it will affect consumer access to transportation." KBB found an average income earner will need to spend 40 weeks working to finance the purchase of a new car. Such statistics, as Smoke notes, are making the financing of vehicles particularly difficult for lower earners. "Higher rates have already shifted access to cars and financing towards wealthier consumers," he says. Limited access to vehicles also makes it challenging for consumers to react as they would have done in similarly challenging economic times. In the aftermath of the 2008 recession, consumers enjoyed the benefits of incentives on vehicles as well as sales by dealers eager to sell. But with less inventory available and less incentive for drivers. Two major reactions to the possibility of inflation continuing to rise is that overall debt is growingwhich is reflected in rising delinquency rates as well as drivers who are experiencing higher the rate at which they are depreciating. The amount of auto loan debt continues to increase In total loan balances have increased 8 percent between quarter one of 2021 until 2022 according Experian. This is reflected in the huge . Alongside the overall growth in debt, the number of is also increasing. The second quarter in the year 2022, TransUnion discovered 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 following the pandemic, this rise is nonetheless notable, especially for those who are the most severely affected. "Delinquencies remain at 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. It is also predicted that auto loan balances will exceed any remaining student loans within the first quarter of 2023, as per the Consumer Financial Protection Bureau. This increases the domino effect that moves made by central banks Central Bank have on vehicle affordability. Therefore, when delinquencies are returning to pre-pandemic levels, it's crucial to know how rising interest rates will continue to increase the cost of a vehicle, and thus the risk of delinquency. Drivers are confronted by a faster than normal depreciation of their vehicles On the top of the high cost of vehicles and interest rates, car owners are likely to lose money in the next few months because of the speedier depreciation of their vehicles according to Henry Hoenig, data journalist for Jerry. The biggest influence in this situation comes down due to the timing of when people buy their cars. "People who bought used vehicles within the last year or two have paid exorbitant price," Hoenig explains. In the event that the market for used cars gets cooler, these buyers are at the highest risk of rapid depreciation. But it is not all bad news for vehicle owners. "For at least the next year or so, the value of used vehicles will likely not fall to what they were prior to the big runup over the last two years," Hoenig says. This is due due to the fact that demand will not return to its the normal levels anytime within the next few months. Now may not be the ideal time to purchase cars. High costs for vehicles aren't the only expenses that Americans are currently faced with. "Consumers are being pushed in a variety of ways due to the present climate 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 is among the biggest expenditures people make -- and with the high interest rates it is possible to be a viable option. The truth of high prices is not a surprise, but waiting to make a large purchase like a car could mean money saved. If you do not have the privilege of waiting make sure you are prepared to pay more and think about ways to save money when purchasing the car you want in .


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Writen by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers with the ways and pitfalls of borrowing money to purchase the car they want.



Editor: Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping their readers feel confident to take control of their finances by providing clear, well-researched information that breaks down otherwise complicated subjects into digestible pieces.






Auto loans editor




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