Higher Rates Add to Affordability Issues Featured

By Staff Writer June 15, 2018

Interest rates continue to rise and that is starting to have an effect on varios parts of the car business.

The Federal Reserve recently increased the federal funds rate by 0.25 percent to o between 1.75 percent and 2 percent.

Creditors quickly responded by announcing they were increasing their rates. For example, Huntington Bancshares Inc. increased its prime rate to 5 percent from 4.75 percent.

“These increases are impacting lending and borrowing costs across the U.S. economy,” said Jonathan Smoke, chief economist for Cox Automotive. “Average rates on automotive loans are up slightly more than a percentage point over last year and near seven-year highs. “

This has increased the average monthly payment by $14, Smoke said.

Cox Automotive senior economist Charlie Chesbrough said the rate hike affects more than consumers. Manufactures and dealers are also impacted.

One other area affected is incentives. For a $35K vehicle, providing ‘0-for-60’ at 2.9 percent vs 3.9 percent is a difference of over $900.

The higher rate also increases floor plan costs.

The higher rates are adding to the existing issue of affordability for new cars.

Melinda Zabritski, senior director for Experian Automotive’s financial solutions team, spoke about this topic at the recent State Government Affairs and Legal Issues Forum jointly hosted by the American Financial Services Association and the National Association of Consumer Credit Administrators 

She said in the mid 1980s, car finance terms started to increase from 46 to 52 months. Today, more than 1 in 4 finance contracts exceed 73 months with some reaching 84 months.

In the first quarter of 2017, average car financing was at $31,000 with an average loan rate of 5.1 percent. That would translate into a vehicle loan for 48 months at $717 a month.

But by increasing the term to 72 months the average monthly payment drops to $502. At 84 months, the monthly payment is $440. 

Zabritski said the average per capita income in the United States is $31,000, the same figure as the average new car financing. In the past 10 years, the average new car finance amount has risen from $24,000 to today’s $31,000.

“The average American can’t afford a new car,” she said.

 

 

 

 

 

Last modified on Friday, 15 June 2018 19:25