Auto consumers feel pinch as interest rates rise
Washington — Car buyers who already are reeling from high sticker prices are finding it harder to afford new vehicles as interest rates continue to rise.
The average annual percentage rate for a new-car loan was 5.8 percent last month, up a full percentage point from September 2017. In real terms, that means someone taking out a five-year, $30,000 car loan would pay $828 in additional interest over the course of the loan: $4,632 in interest payments vs. $3,804.
The last time the average interest rate for a car loan was above 6 percent was January 2009.
"It's a major concern for us," said Wes Lutz, the president of Extreme Dodge Chrysler Jeep Ram in Jackson, who also serves as chairman for the National Automobile Dealers Association. Lutz said rising interest rates — combined with rising vehicle prices — are beginning to hurt new-car sales. Sales were off 7 percent last month nationwide.
Concerns about interest rates and trade wars were behind an 831-point drop Wednesday for the Dow Jones Industrial Average. That led President Donald Trump to again criticize the Federal Reserve for raising interest rates.
“The Fed has gone crazy,” he told reporters on Wednesday as he arrived in Pennsylvania for a campaign rally. The central bank “is too tight,” he added.
The Federal Reserve has systematically raised the borrowing rate that banks charge each other for loans — and when banks pay more, so do new-car borrowers.
The Fed has hiked that rate six times in 17 months, most recently in late September when it was boosted by a quarter-point. One more rate hike is expected in 2018, with three forecast for 2019.
Making matters potentially worse, financing incentives from carmakers are becoming hard to find. Only 5.6 percent of vehicles purchased in September were financed with zero-percent loans, compared to 10.1 percent last year. The zero-percent figure was the lowest September level since 2005, according to analyst firm Edmunds.
"Late-model used cars are becoming attractive to people," said Lutz, who spoke to automotive journalists in Detroit this week. "And that should be concerning for everyone, because the new vehicles are more fuel-efficient, they’re safer, and the goal is to get those vehicles on the road and eliminate the old vehicles. If we price these vehicles out of the reach of most consumers, we’re not doing ourselves any good with pollution or gas mileage or safety."
Jon Jakubowski, 43, of Hope, Michigan, said escalating prices pushed him to buy used.
"The price of new cars is ridiculous," said Jakubowski, who bought a 2014 Jeep Cherokee from Lutz's dealership last September. "We all have monthly budgets that we can afford."
The average price of a new vehicle hit $35,742 in September, up $687 from the same month a year ago, according to Kelley Blue Book. Tariffs on imported cars under consideration by the Trump administration could drive that higher.
Jeremy Acevedo, manager of industry analysis at Edmunds, sees little relief coming.
"We're expecting with the Fed rate jumping above 2 percent, we should see new-vehicle APRs jumping above 6 percent, which we haven't seen in a long time," he said.
And as they rise, he sees more people moving away from the new-car market as vehicle prices continue to climb.
"Bigger cars, more content-laden than ever, I think those MSRPs are going to continue to rise," he said. "When you factor in the hit that tariffs are going to provide, it is likely there is going to be little relief on MSRPs for consumers out there."
The Trump administration is considering a 25 percent tariff on imported vehicles. The Center for Automotive Research has estimated such tariffs could increase the price of a new vehicle up to nearly $7,000, depending on where it is built.
Jonathan Smoke, chief economist at Cox Automotive, said car buyers likely will be squeezed further in 2019, noting that the Fed has raised interest rates multiple times in the past two years — and with the possibility that the Trump administration could move forward with its tariff proposal.
"Consumers need transportation, but there are limits to what they can afford," Smoke said. "By necessity, the higher rates are forcing consumers toward vehicles that will deliver the payment that works. As a result, the new-vehicle market is challenged by affordability. And ironically, the most affordable and most popular vehicles are imported and face the threat of new tariffs which will drive their prices higher.”
Lutz said it's all threatening his dealership's bottom line.
"It’s death by papercuts," he said. "Options on the car, interest rates go up, incentives go down and you just chip away at the annual selling rate."
When buyers blanch at costs, he says, the dealership steers them toward lower trim-levels or cheaper models, tries to come up with workable leases — or attempts to put them in late-model used or fleet vehicles.
"You do everything you can," he said. But eventually, he says, everything is going to hit a point where it’s just unaffordable.
"Every year in this business you look at the pricing and you go, ‘Oh, my god, who’s going to pay that?’ — and then people buy them, and they go up the next year. But I think we’re really taxing the American consumer right now."
Staff writer Nora Naughton contributed.