If automakers report better-than-expected results for new vehicle sales in May, the interest rates buyers got may be the primary reason, coming in at their lowest level in seven years.
The annual percentage rate, or APR, on new financed vehicles averaged 4% last month, according to Edmunds.com, which was a bit of a drop compared with the 4.3% average buyers were charged in April. However, it’s a marked difference compared with the rate from the year-ago period of 6.1%.
May’s 4% rate is the lowest average interest rate since August 2013, and the third lowest Edmunds has on record dating back to 2002.
ALG Inc., a subsidiary of TrueCar Inc., expects new vehicle sales will reach 1.008 million units in May 2020, down 32% from a year ago. This month’s seasonally adjusted annualized rate for total light vehicle sales is an estimated 11.8 million units, a level last seen during the Great Recession.
Other experts have similar forecasts. Cox Automotive predicts a 33% decline while Edmunds comes in at 32.5%. However, early returns from Toyota and Hyundai suggest a reason for optimism with both beating the odds coming in reporting 26% and 13% down respectively.
However, each automaker said retail results – everyday buyers – were very strong and it was fleet sales, i.e. rental cars, that caused the biggest part of the decline.
With a month-over-month drop in rates, it might make one assume there were even more 0% finance offers available; however, Edmunds reports that was not the case in May. The number of 0% finance deals was down in May, although the numbers were still well above average.
Zero percent financing made up 24% of all new financed purchases, compared to 25.8% April. Edmunds data also reveals that 47% of all financed purchases received an APR below 3% in May, compared to 41.5% in April.
“Consumers who purchased a car in May got to take advantage of some of the best deals we’ve ever seen, thanks to a combination of Memorial Day weekend sales and generous incentives offered by automakers to spur demand during the pandemic,” said Jessica Caldwell, Edmunds’ executive director of insights. “Even with 0% finance deals down slightly, more car shoppers got better financing rates than usual.”
Although 0% deals did drop, the term length of loans did not as Edmunds experts note they remained near-record highs in May, coming in at 71.4 months, which is the second highest Edmunds has on record, compared to last month’s average of 73.4 months.
“Car shoppers are showing that they’re comfortable committing to longer loans to get the vehicles that they want right now, especially with the ongoing availability of 0% deals,” said Caldwell. “But these incentives aren’t going to last forever. It’s going to get tougher for car shoppers to find good deals as inventory declines over the new few months.”
Despite tough economic times, buyers seem to know a good deal when they see one, according to the University of Michigan’s Surveys of Consumers. The study showed that 64% of those polled in May said it was a good time to buy a car. That was up from 57% in April and the highest level since December. Those saying times were bad or the future was uncertain fell to 28% from 38% the prior month.