Cox Automotive & Edmunds dig deep into the numbers as interest rates climb again
Both Cox Automotive and Edmunds shared intriguing data and insights — such as how much more per month consumers have to pay for a $30,000 retail installment sales contract — following the Federal Reserve raising the target range for the federal funds rate by another 75 basis points, marking the second straight hike of that magnitude when policymakers had the opportunity.
Before Cox Automotive and Edmunds explained the potential impact of these actions at your dealership or finance company, let’s first recap what Federal Reserve chair Jerome Powell said after the interest rate announcement on Wednesday. Powell cut straight to the crux of the decision made unanimously by the nine-member Federal Open Market Committee.
“My colleagues and I are strongly committed to bringing inflation back down, and we are moving expeditiously to do so,” Powell began his opening statement during a news conference. “We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses. The economy and the country have been through a lot over the past two-and-a-half years and have proved resilient.
“It is essential that we bring inflation down to our 2 percent goal if we are to have a sustained period of strong labor market conditions that benefit all,” he continued.
Later in his opening statement, Powell hinted at what might be next at the Fed, which has three more opportunities to modify interest rates this year. The next potential move would be on Sept. 21.
“Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent,” Powell said. “We anticipate that ongoing increases in the target range for the federal funds rate will be appropriate; the pace of those increases will continue to depend on the incoming data and the evolving outlook for the economy.
“Today’s increase in the target range is the second 75-basis-point increase in as many meetings. While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then,” he continued. “We will continue to make our decisions meeting by meeting and communicate our thinking as clearly as possible. As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation.
“Our overarching focus is using our tools to bring demand into better balance with supply in order to bring inflation back down to our 2 percent goal and to keep longer-term inflation expectations well anchored,” Powell went on to say.
Contract data from Edmunds
After the Fed made its announcement, Edmunds went back to its database to undercover metrics going back seven years.
Within used-vehicle financing, Edmunds said the average contract booked in June 2015 had a monthly payment of $367 based on an APR of 7.5% with the average term lasting 65.3 months.
Fast forward to this June, and Edmunds indicated the monthly payment for that used vehicle rose to $554 with the APR sitting at 8.3% for an average contract length of 70.8.
Now in an interest rate environment with the Fed pushing things higher and faster than it has since 1994, Edmunds offered some calculations of potential metrics for a vehicle needing $30,000 in financing for the buyer to take delivery.
Amount Financed | Term | APR | Monthly Payment | Total Interest Paid | Total of Amount Financed and Interest paid |
$30,000 | 60 | 6.0% | $580 | $4,799 | $34,799 |
$30,000 | 70 | 6.0% | $509 | $5,630 | $35,630 |
60 vs 70 Term | ($71) | $831 | $831 | ||
$30,000 | 60 | 7.0% | $594 | $5,642 | $35,642 |
$30,000 | 70 | 7.0% | $523 | $6,627 | $36,627 |
60 vs 70 Term | ($71) | $985 | $985 | ||
$30,000 | 60 | 8.0% | $608 | $6,498 | $36,498 |
$30,000 | 70 | 8.0% | $538 | $7,641 | $37,641 |
60 vs 70 Term | ($70) | $1,143 | $1,143 |
Source: Edmunds
“The latest interest rate hike is yet another blow to consumers who need a vehicle right now,” Edmunds executive director of insights Jessica Caldwell said in a message to Cherokee Media Group. “Car shoppers have already been facing painfully high prices due to limited inventory, in addition to broader issues including a lack of entry-level options like small cars, and an increase in pricey content and options in the vehicles actually available to purchase.
“More consumers will likely be forced into significantly older used vehicles or longer loan terms to make monthly payments slightly more palatable, but this could increase the risk of pricey repairs or even negative equity further down the road,” Caldwell added.
Cox’s Smoke clears the air
Through his blog, Smoke on Cars, Cox Automotive chief economist Jonathan Smoke explained why the Federal Reserve’s decisions might be dragging realtors and mortgage lenders much more than car dealerships and auto finance companies.
“So far this year, the Fed’s movement has impacted the mortgage market more than the auto market. Before today’s changes, the average 30-year mortgage rate had declined by 15 basis points in July, but it had already increased by almost 2.5 percentage points (250 basis) at the end of June compared to the start of the year,” Smoke wrote.
“The term length of a loan determines the impact of a change in rates on the average payment. The longer the loan term, the greater the payment inflation. A 1-point change in a 30-year mortgage has a 12% impact on the average payment, all other factors equal. A 1-point change on a 6-year auto loan has a 3% impact on the average payment,” he continued.
“Therefore, the rate movement that has already happened has had a much more negative impact on the real estate market than on the auto market. That 2.5 percentage point change in mortgage rates has caused a 30% increase in the average payment. That negative impact is evident in the home sales data, as new and existing home sales were down 15% year over year in June,” Smoke went on to say.
“Through mid-July, the average auto loan rate has increased by about 1.5 percentage points for the year. That means that the average payment — all else being equal — has increased by just shy of 5% due to the Fed’s actions. With rates expected to increase even further before year-end, financing costs will make purchases more challenging, especially at lower price points and in the used-vehicle market where rates are often higher,” he added.
As Smoke mentioned, the auto finance space isn’t getting through this interest rate trend unscathed. The Cox Automotive expert closed his blog post by elaborating specifically about the subprime space.
“In the used-vehicle market, higher rates and inflation’s impact on subprime buyers are preventing demand from improving even as vehicle prices decline. Used-vehicle inventories have moved closer to normal levels, and used vehicles are depreciating again,” Smoke wrote.
“In our bifurcated economy, used-vehicle buyers are more likely to be more negatively impacted by higher prices for energy, food and rent,” he continued. “The declining subprime share of transactions reflects this pressure. With auto loan rates continuing to rise, the U.S. vehicle market is becoming even more dependent on higher-priced product and higher-income buyers. As a result, the dream of a new vehicle is fading from view for more American households.”