Rising borrowing costs, exacerbated by recent turmoil in the banking sector, have pushed some buyers out of the US new car market, pressuring manufacturers to discount vehicles.
The cars have become increasingly unaffordable after shortages over the past two years forced consumers to pay the same or higher prices. The Federal Reserve’s efforts to curb inflation have pushed the average interest rate on a new car or truck loan to 8.95%, up from 5.66% a year ago, according to Cox Automotive, which provides services to car dealers.
The failures this month of Silicon Valley Bank and other US banks have also prompted other lenders to tighten access to credit in a fledgling auto market where more than eight in 10 buyers are financing their purchases.
The turmoil has made banks “very aware of the risk they’re potentially facing and basically trying to make sure they’re getting a risk-adjusted return,” said Jonathan Smoke, chief economist at Cox Automotive.
Financial pressure on consumers is bringing discounts back to dealer lots. The rebates, which can take the form of lease deals, special financing rates or cash rebates, averaged about $1,474 per vehicle in February or 3 percent of the average transaction price. Although well below historic levels of 10%, it was the highest level in a year.
“The first domino to fall is really the dealer profits that we saw over the last couple of years,” said Fitch Ratings analyst Stephen Brown. “We’re already seeing a lot of things start to disappear.”
New car and truck prices remain historically high. In February, the average transaction price — how much a buyer paid, including discounts — rose 5 percent from a year earlier to $48,763. But the price had fallen 1% since January, according to Cox Automotive.
High car prices have combined with higher interest rates to drive up borrowing costs. For a six-year car loan of $45,000, Barclays analyst Dan Levy calculated that the average monthly car payment had risen from $702 to $748 between the fourth quarters of 2021 and 2022.
The costs have driven some riskier subprime borrowers out of the market. They account for just 5% of the new car and truck market this year, according to Cox Automotive data, down from 14% in 2019.
Kristy Elliott has seen the impact of rising loan costs at Sunshine Chevrolet, a dealership she runs in Asheville, North Carolina. Customers are more “scared” of higher payments, including those who weren’t concerned last year “because rates kept going up at a pretty fast clip.”
“It’s not that they can’t afford a car, but nobody likes paying interest,” Elliott said.
In February, two lenders serving Sunshine Chevrolet customers abruptly stopped offering loans without giving a reason, Elliott said, forcing the dealership to scramble to continue offering favorable terms. It has relied on GM Financial, the automaker’s captive arm, to offer customers rates as low as 4.99 percent on a used vehicle.
“They actually stepped up and offered very competitive rates,” he said. “They sent us an email a couple of weeks ago right when SVB failed, just stating that they are very healthy financially . . . that we don’t have to worry about losing them as a partner.”
However, many buyers who finance new cars and trucks will pay much more. Ally Financial, the market leader in automotive financing, estimated that car loans originated in the fourth quarter of 2023 will yield 9.6%, compared to 7.4% a year earlier. The bank expects delinquencies to rise to 2.2 percent of average outstanding loans by the fourth quarter, compared with a historical norm of 1.6 percent.
Analysts say automakers need to make more of their low-cost models to maintain strong sales. When parts shortages limited the number of vehicles they could produce, automakers focused on making the most expensive versions of their most expensive cars and trucks and had no reason to discount their products.
General Motors said the company continued to see strong demand for its products and “has been able to grow our US market share with strong pricing.” Ford has forecast that average transaction prices will decline by 5 percent by the end of the year. John Lawler, Ford’s chief financial officer, said on a conference call last month that “there is room to move in dealer margins,” and he sees discounts increasing in the second half of the year.
While automakers were now planning to sell as many vehicles as possible at high prices, the pricing environment was about to get worse for them, said Tyson Jominy, vice president of data and analytics at JD Power.
“Gravity will win,” he said. “Eventually prices will come down. The fact that they go sideways in the first quarter just means it will be later and potentially the drop will be bigger.”
