Alex Tovstanovsky, owner of used car dealer Prestige Motor Works, and Ryan Caton, general manager, inspect inventory on May 28, 2020, in Naperville, Illinois.
Nick Carey | Reuters
DETROIT – The Federal Reserve’s decision to cut interest rates for the first time in more than four years is expected to eventually boost new car sales, but not as quickly or as much as some expect.
Following a half-percentage point, or 50 basis point, rate cut earlier this month, it will take some time for auto loan rates to come down, and they remain near multi-decade highs at over 9.61% for new cars and nearly 14% for used cars. Used car or truck, says kes Auto.
“If the Fed’s forecast is accurate, we will have interest rates more than two and a half points higher than they have been for much of the past 24 years,” he said. Cox Automotive Chief Economist Jonathan Smoak. “In other words, things will be better than what we experienced last year, but this new rate path will not solve affordability challenges.”
Smock said he doesn’t expect the biggest near-term improvement in auto loan rates to come until early next year. He said that unlike home loan costs, which have fallen in recent months, changes in auto loan rates can be delayed because they are actually a function of long-term bond yields based on loan performance.
The 30-day delinquency rate on auto loans has risen sharply in recent years, according to a report Thursday. Board of Governors of the Federal Reserve System. Although still below the peak levels during the Great Recession, auto loan delinquency rates were about 60 basis points above pre-pandemic levels by the end of 2023.
In addition to high interest rates, consumers continue to face near-record average new car prices and inflated used car prices. Both have fallen back from their peaks during the pandemic and supply chain issues in recent years, but remain elevated compared with historical levels.
Edmunds.com reports that the average financing amount for a new car in August was more than $40,700, with a repayment term of 68.8 months, or 5.7 years. By comparison, in September 2019, the average amount raised 69.7 months (or 5.8 years) before the pandemic was about $33,000.
The difference between these payments and the terms of the deal is $3,162, or $178 more per month, According to Edmonds.
“New car sales declined slightly in the third quarter as prices and interest rates remain at historically high levels and affordability remains a significant challenge for U.S. car buyers,” said Jessica Caldwell, Edmunds director of insights.
If interest rates continue to fall, consumers’ monthly payments will ease. BofA Securities estimates that every one-point decrease in the Fed’s benchmark interest rate reduces the average monthly payment for a new car by about $20.
—CNBC Michael Bloom contributed to this report.
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