Borrowing costs

Rising interest rates mean higher borrowing costs to buy a car

Newsday LLC | News day | Getty Images

In addition to the high prices of new and used cars, financing the purchase of a car is about to become more expensive.

As the Federal Reserve raised a key interest rate by half a percentage point on Wednesday, borrowing costs are set to rise on a variety of consumer loans, including those for automobiles. . This is the Fed’s largest increase in more than two decades.

“In the past, interest rate hikes didn’t affect the new car market significantly because automakers subsidized many loans,” said Jessica Caldwell, chief information officer for Edmunds.

Learn more about personal finance:
The great resignation is still burning but may not last
Here’s why strong wage growth could fade
Here’s where I bonds can work in your portfolio

“However, this is the biggest rate hike we’ve seen in over 20 years, so there may be a small impact, but it’s likely to only strengthen the new-vehicle buyer base of buyers. high-income,” Caldwell said.

The biggest effect will likely be felt in the used-car market, she said.

“Given that used car prices are already at record highs, this increase will only make this market more expensive, and buyers will be forced to refrain due to affordability or purchase a vehicle older to keep payouts within a digestible range.”

Amid the auto industry’s continued struggles with limited inventory due to an ongoing shortage of computer chips, consumers were largely forced to contend with new car prices that rose 12.5% year over year, according to the most recent data from the US Bureau of Labor. Statistics. The average price of used cars has increased by 35.3% compared to a year ago.

The average amount paid for a new car reached $45,232, according to an estimate by JD Power and LMC Automotive. The average monthly payment is around $650 for 70.2 months (just under six years), according to The average rate paid for dealer financing is 4.7% and the term is 70.2 months.

For used cars, the average salary is over $30,000, according to research by Edmunds. The average monthly payment is $544 over 70.7 months with an interest rate of 8%.