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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 decisions by offering you interactive financial calculators and tools as well as publishing independent and objective content. This allows users to conduct studies and compare data for free to help you make sound financial decisions. Bankrate has partnerships with issuers including, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn money The products that are advertised on this website come from companies that compensate us. This compensation could affect how and when products are featured on this website, for example for instance, the order in which they be listed within the categories of listing in the event that they are not permitted by law. Our loans, mortgages, and other home lending products. This compensation, however, does have no impact on the information we publish, or the reviews appear on this website. We do not include the universe of companies or financial deals that may be available to you.



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5 min read published on 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 in navigating the details of taking out loans to buy a car.







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 confidence to manage their finances by providing clear, well-researched information that breaks down otherwise complex topics into digestible chunks.









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The last two years of prices for vehicles have been an up and down for both sellers and drivers. This summer saw record-high transactions, with an average MSRP over $48,000 according to Kelley Blue Book (KBB) and then followed. Thankfully, car prices are on the rise during the holiday season, following they hit their peak in the summer. However, simultaneously- interest rates have been on the rise. This synchronous increase in rates and decrease in cost has hampered any real gains for consumers. Rates of interest for new cars in October, up from 4.2 percent a year ago, as per Edmunds information. This has compounded into a frustrating circumstance for drivers getting some relief over cost. As the possibility of an economic downturn is in the near future, it is important to be aware of how this could affect the monthly cost of owning a vehicle. The monthly payments have increased by 3percent. A person's monthly installment is determined by a number of factors, like the vehicle and loan period. However, the price is affected by the benchmark rate, set by the Federal Reserve, which auto lenders use to . As as the Fed rate has increased- currently set at 4.75-5 percent -- over the past year the cost of borrowing money has also increased. That means that lenders have increased their costs to finance. The more it costs for financing, the greater the interest rates, and the more expensive the monthly cost is. October set a record in average monthly new vehicle payments costing $748 according to KBB. Although prices have dropped by nearly 5 percent and monthly payments have increased by 3.3 percent, as per a CoPilot study. Although this increase might seem small, it's actually amounted to over 1,000 dollars in the . This was a disastrous outcome for motorists who were experiencing relief from the decline in price of their vehicles. Any savings could end up being offset by the rising interest rates. Even if vehicle transaction prices are less expensive, the will still be much higher -- which makes it difficult for drivers to in the first place. Lower wholesale prices haven't been translated into retail prices. Logic suggests that when wholesale prices are lower and the cost that the consumer pays should follow however this isn't the situation. Since the start of the year wholesale prices have decreased by more than 15 percent. But the average transaction price for vehicles remains more expensive. This is primarily due to the constant need for new cars. October saw the highest volume of new vehicle inventory since the month of May 2021. However, just because these vehicles are available more readily does not mean drivers can afford the cost of buying them. For many buying a car today isn't worth it. In October, as mentioned earlier, there were records for monthly payments, which topped $750, according to KBB. Therefore, even though automobile inventory rose but it's still low by historical standards. 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 prompted certain borrowers to take out loans using . The difference with financing with a credit union is dependent on the available money present. Credit unions are member-owned and are not for profit which means they typically have low fees and less loan fees and interest. In the second quarter of the year 2022, Experian discovered that credit unions had been growing in market share over the last five years -- falling in with the Fed increasing interest rates. Securing financing through credit unions is just one way that motorists are finding relief from this . The Federal Reserve's battle to stop inflation will not end anytime soon The Federal Reserve walks a thin line between regulating inflation and ensuring affordable prices for consumers. The market for automobiles is an instance of an area where inflation is not yet under control. Unfortunately these rates are likely to disappear anytime soon. "Affordability is going to be a challenge for years 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 the access of consumers 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 says, make vehicle financing especially challenging for lower earners. "Higher rates are already shifting access to vehicles and financing to wealthier customers," he says. Access to cars is also a problem that makes it challenging for consumers to respond as they would have done in similarly challenging economic times. When we look back to 2008's recession, people could benefit from incentives for vehicles and sales by dealers eager to sell. But with less inventory available, there is no relief for drivers. Two major reactions to the likelihood of inflation continuing to rise are that the overall level of debt is increasingwhich is reflected in increased delinquency rates, and drivers who are experiencing higher rates of depreciation. Auto loan debt continues to increase Overall loan balances have increased by 8 percent in the first quarter of 2021 to 2022, according to Experian. This feeds into the staggering . In addition to overall debt growth The number of borrowers has also seen a jump. In the second quarter of 2022, TransUnion found it was 3.34 percentage of car loans were more than 30 days delinquent. This is one of the highest numbers of delinquency over the last couple of years. Although it's true that some of this is due to backlogged accounts due to the pandemic, the growth is still noteworthy particularly for subprime borrowers who are the most affected. "Delinquencies remain in line with the historical average for the majority of credit products. However, levels have increased over the last year, especially in subprime consumer segments," says Michele Raneri, vice president of U.S. research and consulting at TransUnion. It is also expected 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 actions made by central banks Central Bank have on vehicle affordability. As delinquencies rise to levels prior to the pandemic, it is important to understand how increasing interest rates will continue to increase the cost of a vehicle, and thus the chance of delinquency. Drivers are confronted with faster-than-usual vehicle depreciation On top of high vehicle cost as well as interest rate, car owners will likely lose money in 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 down due to the timing of when drivers purchase their vehicles. "People who bought used cars within the last year or two were charged exorbitant price," Hoenig explains. In the event that the market for used cars gets cooler, these buyers are the most at risk of rapid depreciation. However, this isn't all bad news for car owners. "For at least the next two years or so, the value of used vehicles likely won't fall back to the levels they were prior to the big runup over the past two years," Hoenig says. This is due in large part due to the fact that demand will not return to its regular levels anytime within the next few months. This isn't the right time to purchase an automobile. The high costs of car ownership aren't the only cost that Americans are currently faced with. "Consumers are being pressured on multiple fronts in the current climate of high inflation and then by the increased rates of interest the Federal Reserve is implementing to slow it down," Raneri explains. A car purchase can be one of the biggest expenditures individuals make. But with steep interest rates, patience may be a winning strategy. The reality of expensive prices is perhaps inevitable, but waiting for a big purchase like a car could mean money saved. If you do not have the privilege of waiting, prepare to pay more and consider tips to save money when purchasing the car you want in .


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Written by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers with the details of using loans to buy 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 feel confident to control their finances through providing precise, well-researched and well-documented facts that break down otherwise complicated subjects into digestible pieces.






Auto loans editor




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