Rising interest rates are expected to dampen consumer demand, starting with the most credit-struggling borrowers, but experts say other current factors are hurting affordability more than interest rates. These include the continued shortage of new vehicles, weak manufacturer incentives, weak dealer rebates, and the shift to larger, more expensive trucks.
Industry insiders say it’s important to watch the following trends in this rising rate environment:
- Weak incentives: Incentives are down on average, but there are low rate incentives in the market, often tied to shorter loan terms. Edmunds says some well-qualified consumers are accepting higher monthly payments in exchange for less subsidized rates that save money on interest.
- Credit Union Popularity: Some buyers (and dealers) turn to credit unions for financing. Credit unions have a lower cost of funding than more regulated banks and captive finance companies, so they can often offer lower interest rates.
- Delayed purchases: Some buyers postpone vehicle purchases by keeping and repairing current cars and trucks.
Sooner or later, it stands to reason that interest rates are bound to take a bigger share of sales, especially in subprime mortgages, insiders say
“The effect of interest rates is that they’re really going to drive away the most price-sensitive buyers,” Tyson Jominy, vice president – data and analytics, JD Power, told Wards. “Do we see it in the sales? No, we haven’t really seen it in the sales yet,” he said in a telephone interview.
“The payments are still high; there is no debate on that. (However), the large preponderance of the increase is not driven by rates so far.
Jominy estimates that from September 2019 to September 2022, the average monthly payment for a new vehicle increased by about $150 per month, to about $700. Of that amount, he says, only about $20 is directly attributable to interest rates.
The Federal Reserve has raised the federal funds rate five times so far in 2022, for a combined increase of 3 percentage points, from virtually zero. But Jominy says the net effect since 2018 is an increase of only about 80 basis points, or 0.8 percentage points. This is because the Fed cut rates in 2019 and 2020.
Dealers and CFOs say higher rates alone aren’t causing slower sales, yet.
“I haven’t seen any setbacks because of it,” says Bruno Demir, President and Master Dealer, Cape & Islands Auto Group, South Yarmouth, MA. The group includes a Mitsubishi new car franchise and a separate used car store.
Edmunds reports that the average new vehicle loan rate for the third quarter of 2022 is 5.7%, up from 4.3% a year earlier. The average monthly payment is $703, up about 12% from a year ago, they say.
“Consumers know the prices are higher because it’s become quite common for everything in their lives,” says Jessica Caldwell, executive knowledge manager at Edmunds. “If you look back just a few years ago, the average transaction price in September 2020 was under $40,000, and now it’s over $47,000.”
Edmunds says 9.3% of new car loans had an average loan term of 48 months or less in Q3 2022, compared to 4.5% in Q3 2020. This is likely the result of borrowers –those who can afford it, accepting higher payments and a shorter term in exchange for lower interest charges, Caldwell says.
Edmunds says the monthly payment nearly doubles, to $1,144, on a $40,000 auto loan for 36 months, at 1.9% APR, from $644 at 5% APR, for 72 months. But the shorter-term loan saves $5,200 in interest over the life of the loan.
Dealer Richard Herod III, general manager and managing partner at White Bear Mitsubishi, White Bear Lake, MN, says that while the incentives are lower on average, there are incentives to be found.
“We have not seen any change in consumer behavior. What we have seen is a change in the behavior of manufacturers” in terms of greater incentives, says Herod. “Jeep, Mitsubishi, Toyota and Nissan all have advertised rates below 3%.”
Dina Wilson, general manager of Timbrook Kia, Cumberland, MD, and chief financial officer of Timbrook Automotive, says many of her customers get car loans from credit unions, to get better rates.
“In our area of western Maryland, we’re in credit union heaven and they haven’t raised their rates yet,” she says.