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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 has a specialization in helping readers with the ways and pitfalls of borrowing money to purchase a car.







Edited 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 take control of their finances by providing clear, well-researched information that breaks down otherwise complex subjects into bite-sized pieces.









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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 was a record year for transactions, and an MSRP of $48,000, as per Kelley Blue Book (KBB) and then followed. Thankfully, car prices have been leveling in the last few weeks, following they hit their peak this summer. However, simultaneouslythe interest rates are increasing. The simultaneous rise in rates and a decrease in cost has hampered any positive outcomes 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 created an unhappy situation for motorists who are finally feeling some relief from price. As the possibility of an economic downturn is in the near future, it is important to be aware of how this could ripple down and impact the cost of owning the vehicle. Monthly payments are increasing by 3.3%. The monthly payment is based on many elements, such as the car and loan duration. However, the price is dependent on the benchmark rate, set by the Federal Reserve, which auto lenders utilize to . Since the Fed rate has increased -- currently set at 4.75-5 percent -- over the past year, the cost to borrow money has also increased. The result is that lenders have increased the cost to finance. The more money you pay to borrow, the higher the interest rates and thus the higher the monthly cost is. October set the record for the monthly average of new car payments of $748 as per KBB. Although prices have dropped by almost 5 percent and monthly payments have increased by 3.3 percent, according to an 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 motorists who were feeling relief from declining price of their vehicles. The savings that could be made are being offset with the rise in interest rates. Even if the prices for vehicle transactions are less expensive but they'll still be much higher -- which makes it difficult for drivers to save in the beginning. Lower wholesale prices have not been reflected over to retail 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 transaction price for vehicles remains more expensive. This is mostly due to the continued demand for new vehicles. October saw the highest volume 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 drivers it is clear that the price to purchase currently isn't worth it. In October, as mentioned earlier, there were records for monthly payments, which topped $750 according to KBB. Also, even though the automobile inventory rose however, it is still low according to norms of the past. This shortage of inventory means continued high prices in the retail industry. A rise in credit union auto loans A reaction to the high interest rates has led some borrowers to borrow with . The distinction between financing with a credit union is based on the available money present. Credit unions are member owned and are not for profit, meaning they generally have less fees and lower loan interest rates. The second quarter ended the year 2022, Experian found credit unions have trended up in market share over the last five years, while falling in with the Fed increasing interest rates. Securing financing through credit unions is one way drivers are finding relief in this . The Federal Reserve's battle to stop inflation will not end anytime soon The Federal Reserve walks a thin line between controlling inflation while ensuring that prices remain affordable for consumers. The auto market is one illustration of which inflation isn't yet under control. And, unfortunately the higher rates are expected to not go away 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 but it will affect the access of consumers to transportation." KBB found an average income earner will need to put in 40 weeks of work to finance the purchase of a new car. These kinds of statistics, Smoke says, make vehicle financing especially challenging for those with lower incomes. "Higher rates are already shifting access to cars and financing to more wealthy consumers," he says. The lack of access to vehicles makes it challenging for people to take the same actions they may have in similarly difficult economic times. When we look back to 2008's recession, people could benefit from incentives on vehicles as well as sales by dealers eager to sell. However, with fewer inventory options and less incentive provided to motorists. Two major reactions to the probability of inflation rising are that the overall level of debt is increasingwhich is reflected in increased delinquency rates, and drivers who are experiencing higher rate of appreciation. Auto loan debt is continuing to rise. In total loan balances have grown 8 percent from quarter one of 2021 until 2022 according to Experian. This feeds into the massive . Alongside the general debt growth the amount of debt increased. The second quarter in 2022 TransUnion discovered the following: 3.34 percent of auto loans were more than 30 days delinquent. This is one of the highest delinquency numbers in the past couple of years. While it is true that part of the reason is due to the backlog of accounts after the pandemic, this growth is still noteworthy especially for subprime borrowers who are most greatly affected. "Delinquencies remain in line with previous levels for the majority of credit products. However, levels have increased over the last year, particularly among the subprime segment of consumers," says 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 quarter of 2023, as per the Consumer Financial Protection Bureau. This increases the domino effect that actions made by the Central Bank have on vehicle affordability. Therefore, when delinquencies are returning to levels prior to the pandemic, it is crucial to know how rising interest rates will continue to make expensive -- increasing the risk of delinquency. Drivers are confronted with a higher rate of depreciation than usual on top of high vehicle cost along with interest costs, motorists will likely lose money in the months ahead because of the speedier depreciation of their vehicles according to Henry Hoenig, data journalist for Jerry. The primary reason for this is from the timing at which people buy their cars. "People who bought used cars within the last year or two paid inflated price," Hoenig explains. In the event that the market for used cars cools these drivers are at the highest risk of rapid decline. However, it's not all bad news for car owners. "For at least the next two years or so, used vehicle prices likely won't fall back to what they were prior to the big runup over the last two years" Hoenig says. This is due in large part to the fact that supply will not return to its 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 aren't the only cost that Americans are currently faced with. "Consumers are being pressured in a variety of ways due to the present 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 most expensive purchases many consumers make. And with the high interest rates being a factor, patience could be a successful strategy. The fact that prices are high is perhaps inevitable, but waiting for a big purchase like a car could result in savings. If you do not have the luxury of waiting for a car, be prepared to pay more and look into ways to save when buying a car in a .


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Authored by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ins and outs of securely borrowing money to purchase an automobile.



Editor: Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate since late 2021. They are committed to helping readers gain the confidence to take control of their finances with clear, well-researched information that breaks down complex topics into manageable bites.






Auto loans editor




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