Rising Interest Rates to Hit Used Car Market

Rising interest rates are expected to hit the used car market, while new car buyers will hardly notice rate hikes, analysts predict.

The Federal Reserve Board hiked the discount rate by half a point earlier this week — its biggest hike in two decades — as it moves to relieve the inflationary pressures created mainly by supply chain disruptions and rising energy costs.

Cox Automotive noted this week the rates on auto loans have also moving higher but not by as much as on home mortgages. Average new auto loan rates have moved up about 70 basis points year to date. Average used auto loan rates have increased about 75 basis points.

“With rates expected to increase by well more than a point beyond the increases observed so far, financing costs will quickly make financing big-ticket purchases more challenging. This is exactly what the Fed wants to see. As demand for homes, cars, and other durables declines in response to declining affordability, the rate of price increases should slow as well,” Cox noted.

Getting back to normal

Cox noted used vehicles have already returned to being depreciating assets in 2022, so that is one component of inflation that is already coming down.

However, the Fed’s moves likely won’t impact new vehicle sales, which are already being limited by the lack of supply. As a result, the new vehicle market is likely to remain inflationary as supply remains very tight and is not likely to improve substantially before 2023, Cox said, since sales of new vehicles are concentrated among affluent buyers.

For consumers planning to get the lowest possible monthly payments in 2022, the clock is ticking, Cox Automotive noted.

Loans for used cars getting more expensive

Jessica Caldwell, lead automotive analysts for Edmunds.com, noted, “The Fed’s latest interest rate hike could play out in entirely different ways for the new and used car markets.”

Typically, interest rate hikes don’t have a big impact on the new car market because auto manufacturers subsidize so many loans. Even though this is the biggest rate hike 22 years, the ongoing inventory shortage coupled with strong demand likely means the rising interest rates will have a minimal effect on the market. The new vehicle buyer base, which has a higher income than the average consumer is driven off during times like this.

“We can expect a more significant ripple effect on the used side, where more buyers pay market rates that are generally not subsidized. With used car prices already at record highs, the interest rate hike will only make this market more expensive. Some buyers will be forced to sit out entirely or buy an older vehicle to keep payments within an affordable range.”

For shoppers looking for a vehicle in the near term, Edmunds recommends considering all vehicle types and being mindful of all costs involved in the vehicle purchase process, including interest payments, in addition to monthly payments and other financing terms.”