Rising interest rates should crimp consumer demand—starting with the most credit-challenged borrowers — but experts say other current factors hurt affordability more than interest rates. Those include the ongoing new-vehicle shortage, low manufacturer incentives, low dealer discounting and the shift to bigger, more expensive trucks.
Industry insiders say it’s important to watch the following trends in this environment of rising rates:
- Low incentives: Incentives are way down on average, but there are some low-rate incentives in the market, often tied to shorter loan terms. Edmunds says some well-qualified consumers are taking on higher monthly payments in return for lower-subsidized rates that save money on interest.
- Credit Union popularity: Some buyers (and dealers) are switching to credit unions for financing. Credit unions have a lower cost of funds than more highly regulated banks and captive finance companies, so they often can offer lower interest rates.
- Delayed purchases: Some shoppers postpone vehicle purchases keeping and repairing current cars and trucks.
Sooner or later, it stands to reason interest rates should take a bigger bite out of sales, especially in subprime, insiders say
“The effect of interest rates is, it’s really going to peel away the most price-sensitive buyers,” Tyson Jominy, vice president- data and analytics, J.D. Power, tells Wards. “Do we see it in the sales? No, we haven’t really seen it yet in the sales,” he says in a phone interview.
“Payments are still high; there’s no debating that. (However), the vast preponderance of the increase is not driven by rates so far.”
Jominy estimates that from September 2019 to September 2022, the average monthly new-vehicle payment is up roughly $150 per month, to about $700. Of that amount, he says only about $20 is directly attributable to interest rates.
The Federal Reserve has hiked the federal funds rate five times so far in 2022, for a combined increase of 3 percentage points, starting from essentially zero. But Jominy says the net effect since 2018 is an increase of only about 80 basis points, or 0.8 percentage points. That’s because the Fed cut rates in 2019 and 2020.
Dealers and finance managers say higher rates by themselves are not causing a sales slowdown—yet.
“I have not seen any pullback because of it,” says Bruno Demir, president and dealer principal, Cape & Islands Auto Group, South Yarmouth, MA. The group includes a Mitsubishi new-car franchise and a separate used-car store.
Edmunds reports 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% vs. a year ago, they say.
“Consumers know prices are higher, because it’s become fairly common for everything in their lives,” says Jessica Caldwell, Edmunds’ executive director of insights. “If you look back just a couple of years ago, the average transaction price in September 2020 was below $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 the third quarter of 2022, vs. 4.5% in the third quarter of 2020. That’s probably the result of borrowers –those who can afford it—taking on higher payments and a shorter term in return for lower interest expenses, 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, vs. $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 incentives are lower on average, there are incentives to be found.
“We haven’t seen a change in consumer behavior. What we have seen is a change in manufacturer behavior” in terms of bigger incentives, Herod says. “Jeep, Mitsubishi, Toyota and Nissan all have advertised rates under 3%.”
Dina Wilson, general manager at Timbrook Kia, Cumberland, MD, and director of finance for Timbrook Automotive, says many of her customers are getting auto loans from credit unions, to seek better rates.
“In our area, Western Maryland, we are in credit union heaven and they have yet to raise their rates,” she says
