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5 minutes read. Published March 22, 2023
Authored by Rebecca Betterton Written by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers to navigate the ins and outs of securely borrowing money to purchase an automobile.







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 passionate about helping readers gain the confidence to manage their finances with precise, well-researched and well-researched content that break down complex subjects into bite-sized pieces.









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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 price transactions and an MSRP of $48,000, as per Kelley Blue Book (KBB) and followed suit. Fortunately, prices for cars are on the rise in the last few weeks, following the peak price of in the summer. But , at the same time -the interest rates are on the rise. The simultaneous rise in rates and decrease in cost has hampered any real gains for consumers. Interest rates for new vehicles in October, up from 4.2 percent just a year ago, according to Edmunds data. This has created an unhappy situation for motorists getting some relief over sticker cost. As the possibility of the recession is looming, it is important to know how it could ripple down and impact the cost of owning an automobile. Monthly payments are increasing by 3% A driver's monthly payments are based on a number of variables, including the car and loan period. However, the price is affected by the benchmark rate, set by the Federal Reserve, which auto lenders utilize to . Since as the Fed rate has risen -which is currently set 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 it costs for financing, the greater the interest rates, and the more expensive the monthly cost is. October set a record for average monthly new vehicle payments that cost $748, according to KBB. Even though prices have fallen by almost 5 percent, monthly payments are up 3.3 percent, as per an CoPilot study. Although the increase of 3.3 percent may seem small, it's actually amounted to over 1,000 dollars in the . This was a disastrous outcome for drivers who were finally getting relief from falling price of their vehicles. The savings that could be made are being wiped out with the rise in interest rates. Even if vehicle transaction prices are less expensive but they'll still be higher, making it impossible for drivers to in the beginning. Lower wholesale prices have not been reflected over to retail Logic suggests that when wholesale prices are lower and the cost that the consumer pays should follow however, that is not the case. Since the beginning of the year wholesale prices have fallen more than 15 percent. But the average cost of transactions for vehicles is still much higher. This is mostly due to the constant need for new cars. October saw the highest volume of inventory of new vehicles since the month of May 2021. But just because the 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 mentioned, October set record-breaking monthly payments of nearly $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. Increase in credit union car loans One reaction to high interest rates has prompted some borrowers to finance with . The difference between the credit union is dependent on the available money present. Credit unions are member owned 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 increased their market share over the past five years, while falling in accordance with the Fed raising interest rates. Credit unions are a great source of financing. is only one of the ways drivers are finding relief in this . The Fed's fight to quell inflation will not end anytime soon The Federal Reserve walks a thin line between regulating inflation and maintaining accessible prices for consumers. The market for automobiles is an instance of an area the areas where inflation isn't in control. And unfortunately the higher rates are not expected to disappear anytime soon. "Affordability will be challenged for years to come in both used and new markets," explains Cox Automotive Chief Economist Jonathan Smoke. "It's not the fault of the Fed however, it could impact the access of consumers to transportation." KBB found an average earner would need to put in 40 weeks of work to pay off the purchase of a new car. Such statistics, as Smoke notes, are making the financing of vehicles particularly difficult for those with lower incomes. "Higher rates are already shifting the availability of vehicles and financing to more wealthy consumers," he says. The lack of access to vehicles makes it challenging for consumers to react as they may have in similarly challenging economic times. When we look back to 2008's recession, drivers were able to benefit from incentives on vehicles as well as sales by dealers wanting to sell. However, with fewer inventory options, there is 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 increased delinquency rates, and 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 of 2021 until 2022 according to Experian. This feeds into the massive . On top of overall growth in debt The number of borrowers has also seen a jump. In the second quarter of 2022, TransUnion found that 3.34 percentage of car loans were more than 30 days delinquent. This is one of the highest delinquency numbers in the last couple of years. While it's true some of this is due to accounts that have been logged due to the pandemic, the increase is still notable especially for subprime borrowers who are most greatly affected. "Delinquencies remain in line with the historical average for the majority of credit products. However, they have increased in the past year, especially in subprime consumer segments" states Michele Raneri, vice president of U.S. research and consulting at TransUnion. It is also expected that auto loan amounts will be higher than the remaining balance of student loans in the first quarter of 2023, as per the Consumer Financial Protection Bureau. This increases the domino effect that actions made by Central Bank actions Central Bank have on vehicle affordability. So, as delinquencies return to levels prior to the pandemic, it is important to understand how increasing rates of interest will make expensive -- increasing the risk of delinquency. Drivers are being met with faster-than-usual vehicle depreciation On in addition to the higher cost of cars along with interest costs, car owners will likely lose money in the coming months due to the faster depreciation rate of vehicles according to Henry Hoenig, data journalist for Jerry. The primary reason for this is down due to the time of year that the owners purchase their cars. "People who purchased used cars within the last year or two paid inflated costs," Hoenig explains. The used car market cools these drivers are most at risk of rapid decline. However, it's not all bad news for vehicle owners. "For at most the next year or so, the value of used vehicles will likely not fall to where they were before the big runup over the last two years," Hoenig says. This is due in large part because the supply won't return to normal levels within the next few months. It's not the right time to purchase an automobile. The high costs of car ownership aren't the only expenses that Americans are being afflicted with. "Consumers are being pushed on multiple fronts in the current situation of high inflation and secondarily by the higher rates of interest that the Federal Reserve is implementing to reduce it," Raneri explains. A car purchase can be one of the most costly purchases people make -- and with the high interest rates it is possible to be a successful strategy. The reality of expensive prices is not a surprise, but waiting for a big purchase like a car could result in savings. If you do not get to wait make sure you are prepared to pay more and look into ways to save when buying an automobile in .


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Writen 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 the car they want.



The edit was done by Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers feel confident to control their finances by providing concise, well-researched, and clear data that breaks otherwise complicated subjects into digestible pieces.






Auto loans editor




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