The Federal Reserve has just lowered its interest rate for the first time after more than four years which, in due course may be seen to provide some stimulus for new automobile sales; but the near-term impact may not necessarily be felt as having gone into effect overnight or all of a sudden as most are likely to perceive. The half-percentage-point rate decrease announced earlier this month will take some time to feed through into auto loan rates, which are currently running near records. That is over 9.61 percent for new and nearly 14 percent for used cars and trucks, according to Cox Automotive data.
If the Fed’s projections are right, we will be operating with rates more than two and a half points higher than the average over the last 24 years,” said Jonathan Smoke, chief economist for Cox Automotive. “And while conditions could be better than last year, affordability concerns are unlikely to be subdued by recent rate cuts.”
Expectations for meaningful declines in auto loan rates aren’t anticipated until the first quarter of next year. Unlike home loans, which of late have been experiencing declining costs, auto loan rate changes tend to lag since they are indexed off longer-term bond yields tied to loan performance.
More than these pressures, delinquency trends for the automobile lending industry have become significantly higher over the past few years. Based on a report by the Board of Governors of the Federal Reserve System, as of December last year, delinquencies stood at about 60 basis points above where they were before the pandemic, but remain quite far from peak levels, historically and during the period of the Great Recession.
High interest rates are rounding out the group of factors colluding to make new vehicles expensive and used cars pricier than ever. Those prices have backed off a bit from pandemic highs and subsequent supply chain bottlenecks but are still significantly higher than historical averages. The average financing amount for a new vehicle was over $40,700 in August, according to a report from Edmunds.com, with a typical payoff term of 68.8 months. Compared to this, financing pre-pandemic averaged about $33,000 for a period of 69.7 months.
It is going to mean that the total variance in payed amounts throughout the existence of such loans will amount to $3,162 that is equivalent to an extra $178 per month, according to Edmunds. “New vehicle sales were modestly lower in Q3 as affordability challenges remained a stubborn obstacle for American car buyers,” said Jessica Caldwell, senior economist at Edmunds.
If interest rates continue to fall, consumers may eventually enjoy some welcome relief in monthly payments. BofA Securities estimates a one-point reduction in the benchmark rate by the Fed could translate to an average $20 decline in new vehicle monthly payments. Still, many buyers will have to endure more challenging affordability conditions until those effects materialize.
Read More: Click Here
