Soaring Auto Loan Rates Are the Latest Roadblock for Car Sales

Just when we thought pandemic-induced inventory shortages and runaway price inflation were the only obstacles in the auto industry, soaring interest rates on auto loans have emerged as the latest challenge for car dealerships. The average interest rate on loans for new cars has jumped from 5.66% to 8.95% in the past year, driving average car loan payments up to $784 a month. As a result, dealers now say that interest rates are the number one issue holding their business back, replacing inventory shortages and the economy as the top problems a year ago.

The Impact of Rising Loan Rates

Rising car loan rates have a significant impact on the auto industry. Given that car prices now hover around $50,000 on average, paying higher interest rates on auto loans puts more pressure on buyers’ pockets. This, in turn, slows down the market’s momentum even as auto sales in the first quarter are expected to rise by up to 7.3%. According to a Cox survey of auto retailers, rising rates are now sapping the market’s momentum, with dealers noting that interest rates are the number one issue hindering their business.

The Banking Crisis and Tightened Credit

The recent banking crisis triggered by the collapse of Silicon Valley Bank has further tightened credit, making it harder to qualify for a car loan. Unfortunately, this means people needing auto loans to purchase cars will be hit harder than ever.

The Positive Side of Automakers

Despite the challenges, automakers remain confident that millions of buyers are ready to purchase cars. This is because pent-up demand will be unleashed after years of supply shortages and pandemic-related factory and showroom shutdowns. Furthermore, the annual selling rate is expected to rise to 14.4 million in March, up from 13.5 million a year ago. Before the pandemic, annual US auto sales topped 17 million for five consecutive years. Toyota’s Chief Administrative Officer in North America, Chris Reynolds, feels that there is still consumer confidence and behavior and that people still have money to buy cars.

The Automakers’ Solution

Automakers are trying to offset higher interest rates by offering discounts on financing. For example, Ohio dealer Rhett Ricart says that Ford has made a big difference by contributing 1.9% financing for 60-month loans on pickup trucks in his area.

Related Facts

• The Federal Reserve has steadily increased the federal funds rate over the last year to tame inflation.
• Since March 2020, when the pandemic began, auto loan payments have increased by about $177 a month.
• The University of Michigan, Consumer sentiment index shows that buyer confidence fell this month.
• The Cox survey of auto retailers revealed that dealerships rated “inventory shortages” as their biggest problem last year.

Key Takeaway

Rising auto loan rates are now the latest roadblock for car sales. Nevertheless, automakers remain confident that many buyers want to purchase cars despite the challenges. However, banks need to find a solution to the crisis triggered by the collapse of Silicon Valley Bank and help more people qualify for auto loans. In addition, the auto industry needs to find a solution other than discounted financing to tackle the challenge of rising auto loan rates.

Conclusion

The auto industry has yet to overcome rising auto loan rates. As reported, the problem is now the number one issue holding back businesses that operate in this industry. Automakers, dealerships, and banks all need to work together to find a solution to help people back on the road, whether it be by offering lower financing rates, other financing solutions, or even different payment structures. Only then can the auto industry pick up the speed and progress significantly?