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Soaring Interest Rates on Auto Loans Cause Concern for Dealerships
Columbus, Ohio, car dealer Rhett Ricart has found that rising interest rates on auto loans are now the number one issue affecting his business, even more so than the inventory shortages and economic uncertainty that were prevalent last year during the pandemic.
The Federal Reserve’s steady increase in the federal funds rate to curb inflation has driven up the average interest rate on car loans for new vehicles, according to researcher Cox Automotive. The increase in interest rates coupled with the high average price of a car, which now approaches $50,000, has led to higher auto loan payments and has caused loan recipients to experience “interest shock.”
“Customers aren’t shocked by the increased cost of the vehicle; they’re shocked that they’ve got to pay 7% or 8% to finance it,” said Ricart, who owns stores that sell models by Ford Motor Co., General Motors Co., Nissan Motor Co., and others. “You’re talking tons of money.”
The annual selling rate of cars is expected to rise to 14.4 million in March from 13.5 million a year ago, according to market researchers, as auto sales rise by as much as 7.3%. However, the rising interest rates are slowing down that momentum.
Automakers are attempting to offset the higher interest rates by offering discounts and financing options. However, not all automakers are following suit.
“We can’t pass on all of the costs; that means we’re eating it in our profitability,” said Jack Hollis, executive vice president of Toyota’s North American unit. “How much can the consumer take, month after month of increasing prices?”
Profits Swell as Inventory Increases
Over the last few years, automakers’ profits have swelled as supply chain issues caused inventory to dwindle and prices to rise. As supply catches up with demand, companies are giving up some of their profits in an attempt to keep cars affordable. However, as interest rates rise, consumers may not be able to afford the rising costs of owning a car.
In recent years, the semiconductor shortage that emptied dealer lots is fading. Cars are now sitting on dealer lots for an average of 34 days before being sold, 10 days longer than they sat in 2023. However, as interest rates continue to rise, buyers are cancelling hard-to-get models that they ordered months ago. They may end up paying a lot more for the vehicle than they had originally planned because of the higher interest rates.
The uncertainty caused by rising interest rates means that industry experts cannot say for sure where the market is headed, according to Jonathan Smoke, Chief Economist at Cox Automotive. Though automakers are confident that there are many buyers in the market for cars, potential buyers may be dissuaded by the high interest rates.
