Just when it seemed like things were returning to normal at Rhett Ricart’s Columbus, Ohio, car dealership — after a pandemic-induced inventory shortage and price gouging — a new obstacle arose to overcome. buyers to close the deal: rising interest rates on auto loans .
“They were surprised by the interest,” said Ricart, who owns stores that sell models from Ford Motor Co., General Motors Co., Nissan Motor Co. and so on. “Customers aren’t shocked by the cost of the car going up, they’re shocked that they have to pay 7% or 8% to finance it. You’re talking a lot of money.”
While the Federal Reserve continued to raise the federal funds rate last year to try to lower inflation, the average interest rate on loans for new cars jumped to 8.95% last month, from 5.66 % last year, according to researcher Cox Automotive. That, along with average car prices approaching $50,000, has pushed car loan payments to $784 a month on average, about $177 a month since March 2020 at the start of the pandemic.
Dealers now say interest rates are No. The rate hikes dampened market momentum even though first-quarter auto sales are expected to rise as much as 7.3%, according to a forecast by JD Power and LMC Automotive.
Many of the largest car companies, including General Motors and Toyota Motor Corp., will report quarterly US sales results on Monday.
“A lot of these things that seemed like tailwinds at the beginning of the year quickly turned into headwinds,” Jonathan Smoke, Cox’s chief economist, told reporters on March 27. My head is, I don’t know what, they smoke.
On top of rising loan rates, the banking crisis caused by the collapse of Silicon Valley Bank last month further tightened credit, making it harder to qualify for a car loan.
Yet automakers remain confident there are millions of buyers willing to flood dealership lots as pent-up demand is released after years of supply shortages and factory-related pandemic and showroom closure.
The annual selling rate is expected to rise to 14.4 million in March, from 13.5 million a year ago, according to the average forecast of eight market researchers. Before the pandemic, annual US car sales topped 17 million for five consecutive years.
“Consumer confidence or at least consumer behavior, will continue to be strong,” Chris Reynolds, Toyota’s chief administrative officer of North America, told reporters. “People have money in their pockets, and they still want to buy cars.”
In fact, buyer confidence fell this month in the University of Michigan’s Consumer Sentiment Index.
“A lot of the so-called pent-up demand is basically destroyed because of the lethal combination of prices, interest and payments,” Smoke said.
Automakers try to offset higher interest rates by offering discount financing. Ohio dealer Ricart said Ford has made a big difference by offering 1.9% financing for 60-month loans on pickup trucks in his area.
Food for profit
Automakers’ profits have soared over the past three years as supply-chain snags have caused inventory to shrink and prices have hit record levels. Now that supply has caught up with demand, companies are giving up some of the profits to try to keep cars affordable.
“We can’t pass on all the costs, that means we’re eating into our profits,” Jack Hollis, executive vice president of Toyota’s North American unit, told reporters. “How much will the consumer get, every month increase in” prices?
The semiconductor shortage that has emptied dealer lots in recent years has disappeared as inventories are up 70% since this time last year, according to Cox. Vehicles currently sit on dealer lots for an average of 34 days before being sold. That’s up from 24 days a year ago, data from automotive researcher Edmunds.com shows.
Those favorable factors are still offset by rising interest rates. Interest paid on an average car loan reached $8,764 in February, up from $5,395 a year earlier, according to Edmunds.
“It’s a scary prospect to sign your name to a $40,000 loan in this environment,” said Jessica Caldwell, executive director of insights at Edmunds, in an interview. “People look at the monthly payment and they walk away.”
In Columbus, Ricart saw buyers canceling orders for hard-to-get models they had signed months earlier, when financing was cheaper.
“When they ordered the interest rate was 2% and now it is 8%,” said Ricart. “They end up paying more for that car than they intended.”
–With assistance from Gabrielle Coppola.
