Alex Tovstanovsky, owner of used car dealership Prestige Motor Works, reviews inventory with general manager Ryan Caton on May 28, 2020 in Naperville, Illinois.
Nick Carey | Reuters
DETROIT — The first Federal Reserve decision in more than four years is expected to eventually boost new car sales, but not as quickly as some expected.
Interest rates were cut by 0.5 percentage points (50 basis points) earlier this month, and although it will take some time for this to spread to car loan rates, car loan rates are now over 9.61% for new cars and nearly 14% for new cars. It remains at the highest level in nearly several decades. A used car or truck, according to Cox Automotive.
“If the Fed’s predictions are correct, we will be living with interest rates more than 2.5 percentage points higher than they have been for most of the past 24 years,” said Jonathan Smoak, chief economist at Cox Automotive. “In other words, conditions will be better than those endured last year, but affordability challenges will not be resolved by this new rate path.”
Smoke said the biggest short-term improvement in auto loan rates is not expected until early next year. He said unlike the cost of mortgages, which have fallen in recent months, changes to auto loan rates are actually driven by long-term bond yields based on loan performance, so changes could be delayed.
The 30-day delinquency rate for auto loans has increased significantly in recent years, according to a memo released Thursday by the U.S. Federal Reserve. Although still below peak levels during the Great Recession, auto loan delinquency rates will be about 60 basis points above pre-pandemic levels at the end of 2023.
In addition to high interest rates, consumers still face average new car prices near record highs and soaring used car prices. While both are down from the peak of the coronavirus pandemic and recent supply chain issues, they are still elevated compared to historical levels.
Edmunds.com reports that the average new car loan in August was more than $40,700 with a repayment term of 68.8 months, or 5.7 years. By comparison, the average pre-pandemic loan size in September 2019 was approximately $33,000 for 69.7 months, or 5.8 years.
The difference between those payments under the terms of the deal is $3,162, or an increase of $178 per month, Edmunds said.
“New vehicle sales declined slightly in the third quarter as affordability challenges continue to loom large for U.S. car buyers in the form of historic price increases and interest rates,” said Jessica Caldwell, head of insights at Edmunds. I did,” he said.
If interest rates continue to fall, consumers will see some reduction in their monthly payments. BofA Securities estimates that each point decrease in the Federal Reserve’s benchmark interest rate is equivalent to reducing the average monthly payment on a new car by about $20.
— CNBC michael bloom contributed to this report.
