With the Federal Reserve expected to make more interest-rate hikes, more customers are expected to be forced to buy a used car over a new car.
The Fed raised rates a quarter percent in December, which was the third rate hike of 2017. It’s now broadcasting at least three more increases this year.
Potential buyers with excellent credit, the impact of these rate hikes is barely noticeable. However, 43% of people choose to finance their vehicle, and not all of them have great credit.
According to Jonathan Smoke, Chief Economist for Cox Automotive, those potential buyers with subprime credit scores of around 600 or lower are now settling for used cars.
Even just last year, subprime buyers got significantly better rates. The average subprime rate jumped to 16.84% from a rate of 5.91% last year. With this rate increase, buyers are looking at a monthly payment increase of over $100.
Bankrate’s chief financial analyst Greg McBride expects average rates to hit 4.85% on a 60-month new-car loan by the end of the year.
“We didn’t see much change in auto-loan rates over the last couple of years, even as the Fed was raising interest rates,” McBride said. “It’s kind of been like water building behind the dam. This year some of that spills over into higher car-loan rates.”
Due to these rate increases, there has already been an increase in used car sales.
Buyers with good credit, however, haven’t been significantly impacted yet. A quarter percent increase is only around $4 for monthly payments for those who have credit scores higher than 660.
While buyers with credit scores of 600 or lower make currently make up about 20% of new-car sales, that number is expected to continue to decrease as rates increase.
Jessica Caldwell, executive director of analysis for Edmunds.com, explains that even though automakers may desire higher rates, they’re also fighting for sales in a declining market at the same time.
While rate increases may not severely impact buyers with good credit, they’re still going to notice a difference. Car buyers are already beginning to lean toward extended loans to lower monthly payments. The average loan is $30,329 at 69 months right now with.