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5 minutes 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 specializes in assisting 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 editing and writing for Bankrate from late 2021. They are committed to helping readers gain confidence to take control of their finances through providing clear, well-researched information that breaks down otherwise complex topics into manageable bites.









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The last two years of car prices have been a rollercoaster ride for both drivers and sellers. This summer saw record-high transaction prices with an average MSRP above $48,000, according to Kelley Blue Book (KBB) and followed suit. Thankfully, car prices are on the rise during the holiday season, following they hit their peak during the summer. But , at the same time -- interest rates have been on the rise. This synchronous increase in rates and a decrease in cost has hampered any positive outcomes for consumers. The interest rates for new cars in October, up from 4.2 percent just one year ago, as per Edmunds information. This has compounded into an unsettling situation for those getting some relief over price. If an economic downturn is in the near future in the near future, it is essential to understand how can affect the cost of owning an automobile. Monthly payments are increasing by 3% A driver's monthly installment is determined by a number of variables, including the car, and the loan duration. But the cost is also affected by the benchmark rate, which is set by the Federal Reserve, which auto lenders employ to . Since as the Fed rate has increasedcurrently at 4.75-5 percent -- over the past year the cost of borrowing money has also increased. That means that lenders have increased the cost to finance. The more money you pay to finance, the greater the interest rates and thus the higher the monthly cost is. October set a record in monthly payments for new vehicles of $748 as per KBB. Although prices have dropped by nearly 5 percent the monthly payment is up 3.3 percent, according to the 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 feeling relief from declining costs for vehicles. The savings that could be made are being offset by the rising interest rates. Even if vehicle transaction prices are less expensive however, they will be much more -- making it difficult for drivers to in the beginning. Lower wholesale prices haven't been translated into retail prices. Logic tells us that If wholesale prices are less then the price consumers pay will follow however it's not the scenario. Since the beginning of the year wholesale prices have decreased by more than 15 percent. But the average cost of transactions for vehicles is still much higher. This is due in part to the continued need for new cars. October saw its highest level of inventory of new vehicles since the beginning of May in 2021. However, just because these vehicles are readily available doesn't mean that drivers are able to afford them. For many, the cost to buy currently isn't worth it. As we've mentioned, October saw records for monthly payments, which topped $750, according to KBB. So, even though vehicles inventory increased however, it is still low according to norms of the past. This limited available supply implies that prices will continue to rise for the retail market. A rise in credit union auto loans Another reaction to rising interest rates has driven some borrowers to borrow with . The distinction between the credit union is determined by the amount of money available. Credit unions are member-owned and not for profit which means they typically have low fees and less loan rate of interest. For the quarter that ended in 2022 Experian discovered that credit unions have trended up in market share over the last five years, while falling in with the Fed raising interest rates. The ability to get financing through credit unions is only one of the ways motorists are finding relief from 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 auto market is one example of the areas where inflation isn't under control. Unfortunately these rates are likely to disappear anytime soon. "Affordability will be in doubt for the foreseeable future in both used and new market," explains Cox Automotive Chief Economist Jonathan Smoke. "It's not the Fed's fault however, it could impact the accessibility of transportation for consumers." KBB found an average wage earner must put in 40 weeks of work to repay a new vehicle. These kinds of statistics, Smoke points out, are making vehicle financing especially challenging for lower earners. "Higher rates are already shifting the availability of vehicles and financing to more wealthy consumers," he says. The lack of access to vehicles creates a challenge for consumers to react as they would have done in similarly challenging economic times. When we look back to 2008's recession, drivers enjoyed the benefits of incentives on vehicles as well as the rush of dealers wanting to sell. However, with fewer inventory options and less incentive for drivers. Two of the main reasons for the possibility of inflation continuing to rise are overall debt growing -that is evident in the rising delinquency rates as well as drivers experiencing faster rate of appreciation. Auto loan debt is continuing to rise. In total loan balances have grown 8 percent from quarter one from 2021 to 2022 according to Experian. This feeds into the massive . Alongside the overall debt growth the amount of debt increased. The second quarter in 2022 TransUnion found it was 3.34 per cent of automobile loans were over 30 days in arrears. This is among the highest delinquency numbers in the past couple of years. Although it's true that some of this is due to the backlog of accounts after the pandemic, this increase is still notable, especially for subprime borrowers who are the most severely affected. "Delinquencies remain in line with the historical average for the majority of credit products. However, levels have been rising over the past year, especially among subprime consumer segments," notes Michele Raneri, vice president of U.S. research and consulting at TransUnion. It is also expected that auto loan balances will exceed the remaining balance of student loans in the first half of 2023, as per the Consumer Financial Protection Bureau. This is a further confirmation of the effect of domino effects that decisions from central banks Central Bank have on vehicle affordability. Therefore, when delinquencies are returning to pre-pandemic levels, it's essential to be aware of how the rising rates of interest will make expensive -- increasing the likelihood 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 next few months due to the faster depreciation rate of vehicles according to Henry Hoenig, data journalist for Jerry. The primary reason for this is from the timing at which the owners purchase their cars. "People who purchased used cars within the last year or two have paid exorbitant prices," Hoenig explains. As the used car market is cooling, these motorists are the most at risk of rapid decline. However, it's not all bad news for vehicle owners. "For at least the next year or so, used vehicle prices will likely not fall to where they were before the massive increase over the last two years," Hoenig says. This is due mainly due to the fact that supply isn't expected to return to normal levels in the near future. It's not the ideal time to purchase an automobile. The high costs of car ownership are not the only expense that Americans are currently faced with. "Consumers are under pressure on multiple fronts due to the present situation of high inflation and secondarily by the higher rates of interest that are being imposed by the Federal Reserve is implementing to reduce it," Raneri explains. The purchase of a car could be among the most costly purchases consumers make. And with the high interest rates it is possible to be a viable option. The reality of expensive prices is perhaps inevitable, but waiting to make a large purchase like a car could result in savings. If you do not have the luxury of waiting make sure you are prepared to spend more money 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 borrowing money to purchase an automobile.



Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers to take control of their finances by providing clear, well-researched facts that break down otherwise complicated topics into bite-sized pieces.






Auto loans editor




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