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Auto Loan Rates Are Rising — but There's Still Some Good News for Car Shoppers - Money

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Car buyers will likely have more options this fall, but it could be an extra expensive time to purchase thanks to the highest auto loan rates in years.

Experts in the automobile industry say the market is shifting in response to the Federal Reserve raising interest rates to combat inflation.

The Fed's rate hikes have caused the average interest rate for new vehicle financing to increase to 5.7% in the third quarter of 2022, up from 4.3% this time last year and the highest level in three years, according to Edmunds.

Heightened borrowing costs will price many consumers out of purchasing new vehicles, experts say.

"High prices and rising interest rates are dealing consumers a one-two punch by catapulting monthly payments into a new realm," Jessica Caldwell, executive director of insights at Edmunds, said in a release.

The average monthly payment for new vehicle purchases was above $700 throughout the third quarter of 2022, according to Edmunds. As new car prices soared in the past year and with auto loan rates up, more than 14% of new car buyers are now paying more than $1,000 for their monthly payments, an increase from 8.3% a year ago.

Supply chain improvements and decreasing competition on the buyer's side could ease prices and improve affordability down the road, but it remains to be seen exactly how prices and auto loan rates will move in the months ahead.

Supply of new cars will likely get better

As supply challenges ease and as higher interest rates slow consumer spending, officials expect competition to cool down for many categories of financed purchases, including new and used vehicles. Federal Reserve Governor Lisa Cook said in a recent speech that price inflation is slowing in the car market.

"Wholesale used vehicle prices have declined considerably, but there is some uncertainty about how long it will take for that decline to show up in consumer prices. Similarly, new car prices should moderate over time as production of new vehicles continues to ramp up," she said.

From September to August, wholesale used vehicle prices dropped by 3% as the supply of used cars is recovering, according to Cox Automotive, the parent company of Kelley Blue Book. Retail prices typically fall down the line after wholesale prices drop, and retail prices of used cars have inched down in recent months too.

New vehicle supply is also improving in the aftermath of pandemic disruptions to the automobile industry, but Cox experts worry that as dealerships get more cars in stock, Americans won’t be able to afford the loans they’d need to purchase them.

"Just as the industry is poised to start seeing volumes increase from supply-constrained recession-like low levels, the rapid movement in interest rates is reducing demand," Jonathan Smoke, chief economist at Cox, said in a report.

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High prices and big auto loans

Americans who purchased cars in the third quarter of 2022 took out larger loans than ever before, according to Edmunds. The average amount financed increased to $41,347, up from $38,315 a year prior.

New vehicle prices are also at a record high in the U.S., according to Kelley Blue Book. Consumers paid an average of $48,301 for new cars in August.

Smoke says the new vehicle landscape in the U.S. is going to become more of a "luxury" market. Car manufacturers are likely to try to cater to higher income buyers who can get better loans and can still afford to purchase cars in today's economy, he says.

Lower income buyers are especially impacted by rising rates because they can't get as favorable loans to begin with. When monthly payments rise, affording a new car becomes impossible for some lower income buyers, Smoke says.

In the past two years, the share of car buyers opting for loans 48 months or shorter has more than doubled, according to Edmunds. Shorter auto loans typically have lower interest rates. The trend indicates that buyers who have the means to pay more on a monthly basis are looking for ways to bring interest costs down.

For buyers who can't afford to pay more in the near term, it could remain tough to buy a car unless interest rates or prices let up. But the downward trend in wholesale used car prices offers some hope that affordability could improve in the future.

More from Money:

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