(Bloomberg) — Just when it looked like things were getting back to normal at Rhett Ricart’s Columbus, Ohio-based auto dealerships after pandemic-induced inventory shortages and price inflation, a new hurdle has emerged to keeping buyers from closing the deal: rising interest rates on auto loans.
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“They get a shock of interest,” said Ricart, who owns stores that sell models from Ford Motor Co., General Motors Co., Nissan Motor Co. And others. “Customers are not surprised by the increase in the cost of the vehicle, they are surprised that they have to pay 7% or 8% to finance it. You’re talking tons of money.”
As the Federal Reserve steadily raised the federal funds rate over the past year to try to control inflation, the average interest rate on new car loans rose to 8.95% last month, from of 5.66% from the previous year, according to researcher Cox Automotive. That, along with average car prices now approaching $50,000, has brought auto loan payments to $784 a month on average, up about $177 a month since March 2020, when start the pandemic
Dealerships now say interest rates are the No. 1 issue holding back their business, replacing inventory shortages and the economy as the top issues a year ago, a Cox survey of retailers showed automobiles Those rate hikes are dampening the market’s momentum, although first-quarter auto sales are expected to rise as much as 7.3 percent, according to a forecast by JD Power and LMC Automotive.
Many of the biggest auto companies, including General Motors and Toyota Motor Corp., will release quarterly U.S. sales results on Monday.
“A lot of these things that looked like headwinds at the beginning of the year have quickly turned into headwinds,” Jonathan Smoke, Cox’s chief economist, told reporters on March 27. “Anyone who tells you they have a strong view of where we are. The boss is, I don’t know what, they’re smoking something.”
In addition to rising lending rates, the banking crisis triggered by the collapse of Silicon Valley Bank last month has further squeezed credit, making it harder to qualify for a car loan.
But automakers are confident there are millions of buyers ready to flood dealership lots as pent-up demand is unleashed after years of supply shortages and factory and showroom closures related to the pandemic.
The annual sales rate is expected to rise to 14.4 million in March from 13.5 million a year ago, according to the average forecast of eight market researchers. Before the pandemic, annual US auto sales topped 17 million for five consecutive years.
“Consumer confidence, or at least consumer behavior, will continue to be resilient,” Chris Reynolds, Toyota’s chief administrative officer for North America, told reporters. “People still have money in their pockets and still want to buy cars.”
In fact, shopper confidence fell this month in the University of Michigan’s Consumer Sentiment Index.
“Much of the so-called pent-up demand has basically been destroyed because of the lethal combination of prices, interest rates and payments,” Smoke said.
Automakers are trying to offset higher interest rates by offering discounted financing. Ohio dealer Ricart said Ford has made a big difference by offering 1.9 percent financing for 60-month pickup truck loans in its area.
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Automakers’ profits surged over the past three years as supply chain woes pushed inventory down and prices to record levels. Now that supply is catching up with demand, companies are giving up some profits to try to make the cars affordable.
“We can’t pass on all the costs, so that means we’re eating into our profitability,” Jack Hollis, executive vice president of Toyota’s North American unit, told reporters. “How much can the consumer take, month after month of increasing” prices?
According to Cox, the semiconductor shortage that emptied dealer lots in recent years is fading, with inventories up 70% from last year. Cars now sit on dealer lots an average of 34 days before being sold. That’s up from 24 days a year ago, data from automotive researcher Edmunds.com shows.
These favorable factors are still being offset by rising interest rates. Interest paid on the average auto loan reached $8,764 in February, up from $5,395 a year earlier, according to Edmunds.
“It’s a daunting prospect to sign your name to a $40,000 loan in this environment,” Jessica Caldwell, Edmunds’ chief information officer, said in an interview. “People will look at the monthly payment and walk away.”
In Columbus, Ricart sees buyers canceling orders for hard-to-get models they signed up for months ago, when financing was cheaper.
“When they asked them the interest rate was 2% and now it’s 8%,” Ricart said. “They’re going to end up paying a lot more for that vehicle than they anticipated.”
–With the assistance of Gabrielle Coppola.
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