Interest rate surge drives US car loan payments to record high

American consumers who borrowed money to buy a new car are in trouble for record loan payments, with one in five owing at least $1,000 a month, as rising interest rates keep pace with expensive inventory. Together they make vehicles less economical.

The rising cost of financing is bad news for carmakers, as some customers abandon more profitable trucks and sport utility vehicles for cheaper models.

This comes as higher interest rates have spread across the consumer economy, from mortgages to credit cards to car loans.

Interest rates on loans averaged 7.4 percent in the third quarter, the highest since 2007, according to car research group Edmunds. The average monthly payment of $736 was a record high, while the share of car buyers paying at least $1,000 per month reached nearly 18 percent.

Sales of new cars, trucks and SUVs are continuing, but prices remain high due to unmet demand caused by a supply shortage triggered by the pandemic.

“Affordability has been a big factor this year,” said Edmunds analyst Jessica Caldwell. “Depressed demand will push up sales rates, but it will only be by people replacing their vehicles or the more affluent.” , , “We’re seeing demand for low-cost vehicles that we haven’t seen for some time.”

The higher financing costs come as the strike by the United Auto Workers union against Detroit’s Big Three carmakers Ford, General Motors and Stellantis enters its fourth week. Continued walkouts could reduce car supply, but higher prices and interest payments threaten to hit demand.

“Prices are a function of supply and demand,” said Bank of America analyst John Murphy. “The weak demand picture could offset supply-side shocks.”

The UAW began the strike gradually on September 15, with more workers joining at more facilities each week. That piecemeal approach means the impact on inventory so far is “negligible,” said Jonathan Smoke, chief economist at Cox Automotive.

On the other hand, interest rates, along with credit availability and the overall economy, are the car industry’s “public enemy No. 1,” he said. “These are not good signs for demand continuing to be strong or improving in the fourth quarter.”

At Ally Financial, which has a large car loan business, Doug Timmerman, president of dealer financial services, said in a memo last week that it had made “the difficult decision to reduce expenses through a reduction in headcount” and some Will offer buyout to employees.

Detroit-based Ally contributed $9.8 billion in consumer car loans in the second quarter, down 21 percent from $12.4 billion a year earlier.

A spokesperson acknowledged the “challenging broader environment” and said the cuts affect less than 5 percent of its workforce.

Small cars with cheap sticker prices are moving away from the dealer much faster than more expensive cars. Compact models such as the Toyota Corolla and Honda Civic have become popular, Caldwell said, reflecting a shift in U.S. consumers’ preference for fully loaded trucks and SUVs during the era of low interest rates. This change also coincides with the recent rise in petrol prices at the pump.

According to Edmunds data, in August 2021, dealers had a 28-day supply of vehicles priced more than $50,000, and a 32-day supply of vehicles priced below that range. After two years, the supply of vehicles under $50,000 is selling out in 26 days, while more expensive cars and trucks take up to 40 days.

Car manufacturers have increased incentives to lure more buyers into the market. According to Cox Automotive-owned Kelley Blue Book, discounts — whether through leasing deals, special financing rates or cash rebates — averaged $2,365 in August, the highest all year. Still, they remain historically low, accounting for 4.9 percent of the average transaction value, compared to the pre-pandemic norm of about 10 percent.

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