Soaring auto loans likely to rise higher still
Buyers being shunted into used market where rates remain lower
DETROIT — Car salesmen call it “the payment walk,” when a customer wants a new vehicle but is walked instead to the used lot because they can’t qualify for a new-car loan.
With the Federal Reserve seemingly bent on more interest-rate hikes, it’s almost certain that more people will be taking that stroll.
The Fed raised rates a quarter percent in December, the third rate hike of 2017, and it’s broadcasting three more this year.
For would-be buyers with stellar credit, the impact hasn’t been substantial. But many with subprime credit scores of around 600 or below are now settling for cars that already have some miles on them, says Jonathan Smoke, chief economist for Cox Automotive.
Subprime buyers got substantially better rates even a year ago. The average subprime rate of 5.91 percent last year has jumped to 16.84 percent today, Smoke says. For a 60-month loan of $20,000, that means a monthly payment hike of more than $100, to $495.
“Their ability to qualify has changed dramatically,” Smoke says.
Used-car sales are already up, and new-car sales have ebbed, says Bill Perkins, owner of a Chevrolet dealership in Taylor, a suburb of Detroit. Record new-car sales are on the way out. “It’s going to affect everything,” he says. It’s one reason that Cox Automotive lowered its U.S. auto sales forecast this year to 16.6 million, down from an expected 17.1 million in 2017.
Buyers with good credit, scores above 660, haven’t been greatly affected yet, says Melinda Zabritski, Experian’s director of automotive finance. A quarter-point increase is only around $4 per month in these cases, and rates of 4 percent or lower are still around. But as rates rise, Zabritski expects a broader downscaling trend.