Auto interest rates overtake buyers

Fed is broadcasting three more rate hikes this year following the three it piloted last year

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 per cent 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.

New-car sales

Subprime buyers got better rates even a year ago. The average subprime rate of 15.91 per cent last year has jumped to 16.84 per cent today, Smoke says. For a 60-month loan of $20,000, that means a monthly payment hike of more than $10, to $495.

“Their ability to qualify has changed dramatically,” he says.

It’s one reason that Cox Automotive lowered its US auto sales forecast this year to 16.6 million, down from an expected 17.1 million in 2017.

Buyers with credit scores of 600 or lower make up about 20 per cent of new-car sales. Prime credit buyers make up 61 per cent. The rest are in a middle category called nonprime, according to Experian.

Auto loans on average have risen at a slower pace than the Fed’s short-term rate, largely because automakers subsidise loans to goose sales.

Buyers are already steering toward extended loans to lower monthly payments, with the average at 69 months, according to Experian. The average vehicle loan is now $30,329, up $291 from a year ago.