Chicago Automobile Trade Association

Rising interest rates, transaction prices threaten new-vehicle sales

July 13, 2018
It’s getting costlier to buy a new car or truck these days. Costlier, perhaps, than many consumers could be able to afford moving forward.
According to Kelley Blue Book, the estimated out-the-door cost of a new light-duty vehicle hit $35,635 in May, fueled in large part by rising sales of SUVs and, particularly, luxury-minded pickup trucks with sticker prices well above $50,000. 
While the average traction price dropped about $145 versus April’s average price, it is up by $1,187 over May 2017’s average. Prices in both full-size and mid-size truck segments, meanwhile, jumped by 4 percent last month.
What’s more, Edmunds reports the annual percentage rate on the average new-vehicle loan hit 5.75 percent last month, which is 0.71 percent steeper than in April and 1.58 percent higher than in May, 2017. Aside from the Fed recently raising rates, Edmunds says fewer zero-percent financing programs being offered by automakers’ captive finance divisions — they reached their lowest level last month in seven years — is likewise contributing to the rise in APRs.
Not surprisingly, the average loan term now is about 69 months, with 72-month loans being the most common, according to Experian Automotive. A growing number of new-car loans now stretch from 85 to 96 months to keep payments affordable. That’s as long as eight years before a buyer obtains clear title.
Ironically, perhaps, Edmunds said rising rates actually are helping spur sales rather than turn away shoppers. "Since interest rates have been creeping up all year, shoppers are likely thinking it’s better to buy now before rates get any higher," said Jeremy Acevedo, Edmunds’ manager of industry analysis. "However, this is likely a temporary pull-ahead effect, and could come back to bite automakers later in the year."
So how much deeper is the average new-vehicle buyer now having to dig into his or her bank account to cover the cost of a new car or truck? Based on the average transaction price, loan term and interest rate cited above, and an average $3,926 down payment, it’s $535 a month. While that’s only $25 higher than it was a year ago, it’s $80 costlier than it was in May 2013 when the average model cost $26,909 and was financed for 65.6 months at 4.17 percent.
That means a buyer taking possession of a new car or truck last month will pay a total of $40,841 over the life of the average loan versus $33,255 five years ago — an 18.6 percent boost (compared to inflation then at about 7.5 percent.) And that’s despite stagnant growth in the average worker’s inflation-adjusted wages since 2008, according to the Bureau of Labor Statistics. Also, it doesn’t count the added cost to operate a motor vehicle due to rising gas prices, which are up by about 25 percent over the past year.
New-vehicle leasing has helped bolster affordability in recent years. A full third of all new-car and -truck transactions in the first quarter of the year were leased, according to Experian, which is up from 29.9 percent in 2017 and is more than 10 percent higher than it was at the end of 2011. But that’s likely to change as rising interest rates and falling residual values, especially among passenger cars that have fallen out of favor among consumers, drive up payments. 
Automakers could subsidize leasing programs on certain slow-selling models with either cash subsidies or cut-rate interest, but the sense of urgency to do so may not be particularly strong, as dealers are already swimming in waves of off-lease models from the last two and three years that, as it is, are expected to undercut new-model sales.
One more proverbial arrow into the side of St. Sebastian is the fact that new-vehicle financing among buyers having less than stellar credit has dropped precipitously, with loans made to so-called subprime borrowers having credit scores of 670 or less decreasing by 8.4 percent during the first quarter of 2018. 
According to Fair Issac Corporation, the creators and curators of the FICO credit scoring system, this group typically accounts for about 30 percent of all consumers. Those with worse credit are finding it even more difficult to buy a car or truck, with loans made to what’s known as deep subprime individuals (FICO scores under 579) falling by 14.1 percent.
And when subprime car shoppers do qualify for financing, they usually pay substantially more in interest. Recent figures cited by FICO suggest those having credit scores of 660 to 689 are offered interest rates that are nearly twice as high as consumers in the 720 to 850 range.
Fortunately, the new-car market may be healthy enough to withstand these rising interest rates and transaction prices, at least in the near term, but if wages don’t begin tracking upward, we could be seeing fewer consumers able to extend themselves beyond reason to drive home a shiny new ride, particularly those profit-packed pickup trucks.


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