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5 min read Released 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 to navigate the ins and outs of securely taking out loans to buy 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 manage 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 a rollercoaster for both sellers and drivers. This summer was a record year for transaction prices and an MSRP over $48,000 according to Kelley Blue Book (KBB) and then followed. Fortunately, prices for cars are on the rise in the last few weeks, following the peak price of in the summer. However, simultaneouslythe interest rates are rising. This synchronous increase in rates as well as a drop in prices has degraded any real gains for consumers. Rates of interest for new cars were up in October from 4.2 percent just one year ago, according to Edmunds information. This has compounded into an unsettling situation for those who are finally feeling some relief from cost. As the possibility of a recession looms in the near future, it is essential to know how it could affect the monthly cost to own a vehicle. The monthly payments have increased by 3percent. A person’s monthly payment is based on a number of elements, such as the car and loan term. But the cost is also affected by the benchmark rate, which is set by the Federal Reserve, which auto lenders use to . As the Fed rate has risen -currently at 4.75-5 percent — in the last year, the cost to borrow money has also increased. That means that lenders have increased the price of finance. The more it costs for financing, the greater the interest rates and the higher the monthly cost is. October set the record for average monthly new vehicle payments of $748 as per KBB. Even though prices have fallen by nearly 5 percent and monthly payments have increased by 3.3 percent, according to the CoPilot study. While this percent increase may appear small, it adds up to over a thousand dollars during the . This created an unfortunate outcome for drivers who were finally experiencing relief from the decline in 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, the will still be much more — which makes it difficult for motorists to afford it in the beginning. Lower wholesale prices haven’t been reflected over to retail Logic says that when wholesale prices are lower and the cost that the consumer pays should follow — but unfortunately it’s not the case. Since the beginning of the year, wholesale prices have dropped over 15 percent. However, the average price for cars is more expensive. This is primarily due to the continuing demand for new cars. October was the month with the highest amount of new vehicle inventory since the beginning of May in 2021. But just because the vehicles are available more readily does not mean drivers can afford them. For many drivers, the cost to buy currently isn’t worth it. As mentioned, October set record-breaking monthly payments of nearly $750, according to KBB. Therefore, even though automobile inventory rose however, it is still low according to the standards of historical precedent. This limited available supply implies that prices will continue to rise in the retail industry. A rise in credit union auto loans A reaction to the high interest rates has driven certain borrowers to take out loans using . The difference between financing through a credit union is dependent on the cash available. Credit unions are owned by members and are not for profit which means they typically have low fees and less loan interest rates. In the second quarter of the year 2022, Experian discovered that credit unions have increased their market share over the past five years — falling in with the Fed increasing interest rates. Credit unions are a great source of financing. is one way drivers are finding relief in this . The fight of the Fed to curb inflation will not stop anytime soon. Federal Reserve walks a thin line between regulating inflation and maintaining accessible prices for consumers. The auto market is a prime instance of an area which inflation isn’t yet in control. And unfortunately the higher rates are not expected to be going away any time in the near future. “Affordability will be in doubt for years to come in both the new and used markets,” explains Cox Automotive Chief Economist Jonathan Smoke. “It’s not the Fed’s fault, but it will impact consumer access to transportation.” KBB found an average earner would need to work over 40 weeks to finance a new vehicle. Such statistics, as Smoke says, make vehicle financing especially challenging for those with lower incomes. “Higher rates are already shifting the availability of vehicles and financing towards wealthier consumers,” he says. The lack of access to vehicles means that it is difficult for consumers to react as they may have in similarly difficult economic times. In the aftermath of the 2008 recession, drivers were able to benefit from incentives for vehicles and an influx of dealerships wanting to sell. However, with fewer inventory options, there is no relief offered to drivers. Two of the main reasons for the probability of inflation continuing to rise are that the overall level of debt is increasingwhich is reflected in higher delinquency rates and drivers experiencing faster rates of depreciation. Auto loan debt continues to increase Overall loan balances have increased 8 percent from quarter one of 2021 until 2022 according Experian. This feeds into the staggering . On top of overall debt growth, the number of increased. In the second quarter of 2022 TransUnion discovered it was 3.34 per cent of automobile loans were over 30 days in arrears. This is among the highest rates of delinquency in the past couple of years. Although it’s true that part of the reason is due to the backlog of accounts following the pandemic, this rise is nonetheless notable, especially for those who are most greatly affected. “Delinquencies remain in line with previous levels for the majority of credit products. However, they have been rising over the past year, especially among subprime consumer segments” states Michele Raneri, vice president of U.S. research and consulting at TransUnion. The forecast also predicts that auto loan balances will exceed all remaining student loans in the first half of 2023, according to the Consumer Financial Protection Bureau. This is a further confirmation of the effect of domino effects that decisions by the Central Bank have on vehicle affordability. So, as delinquencies return to pre-pandemic levels, it’s crucial to know how rising rates of interest will increase the cost of a vehicle, and thus the risk of delinquency. Drivers are being met with faster-than-usual vehicle depreciation On in addition to the higher cost of cars and interest rates, motorists will likely lose money in the coming months because of the speedier depreciation of their vehicles as per Henry Hoenig, data journalist for Jerry. The biggest influence in this situation comes down to the timing of when drivers purchase their vehicles. “People who purchased used cars within the last year or two have paid exorbitant price,” Hoenig explains. As the used car market gets cooler, these buyers are at the highest risk of rapid depreciation. However, it’s not all bad news for car owners. “For at least 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 supply isn’t expected to return to the normal levels anytime within the next few months. This isn’t the ideal time to purchase cars. High costs for vehicles aren’t the only expenses that Americans are currently being met with. “Consumers are under pressure on multiple fronts due to the present situation of high inflation as well as by the higher rates of interest that the Federal Reserve is implementing to slow it down,” Raneri explains. Buying a vehicle is among the biggest expenditures individuals make. But with the high interest rates, patience may be a viable option. The fact that prices are high is not a surprise, but waiting to make a large purchase such as a car can mean money saved. If you do not get to wait make sure you are prepared to spend more money and think about ways to save when buying a car in a .


Written by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers in navigating the details of taking out loans to purchase an automobile.

Editor: 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 manage their finances by providing clear, well-researched data that breaks otherwise complicated topics into bite-sized pieces.

Auto loans editor

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