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Expected federal interest rate hikes will likely decrease the demand for new cars.
According to Bloomberg, the Federal Reserve may raise interest rates at least three times in 2018, which is leading experts to predict the demand for new cars will fall as it did in 2017, the first year U.S. car sales had declined since 2009.
The anticipated interest rate hikes will cripple the low interest offers which have been partially responsible for the demand for cars. Many analysts believe car sales won’t reach 17 million vehicles this year, compared to 2017 when more than 17 million vehicles were sold.
Why Does the Interest Rate Matter So Much for Car Sales?
With a low national unemployment rate and a soaring stock market, conditions are primed for the interest rate hike.
If the interest rate is bumped up, consumers won’t feel the pinch only when it comes to paying more for cars. They’ll also face bigger bills for all their other loans, including mortgages, student loans, and credit card balances.
And even though the economy appears to be riding high right now, consumers will be leery to take out car loans for a higher rate, especially when they’re paying more for other bills.
“At the same time, higher rates drive up the cost to provide low-rate financing, which eats into profit margins and hurts the carmakers as well,” Charlie Chesbrough, senior economist at Cox Automotive, said to Bloomberg.
When interest rates are on the rise, some consumers who may have considered buying a new car will instead focus their attention on used vehicles in an attempt to keep their monthly payments lower.
But even though it means consumers have to pay more to borrow money, interest rates are increasing for a good reason. Increasing interest rate yield a number of benefits. It can mean higher interest rates for people with savings, and it can keep inflation under control.
Additionally, with the threat of higher mortgage rates on the horizon, the impending interest rate hikes could spur would-be homeowners to take action and finally take the plunge on buying a home before they’ll have to pay more to do so.
How Much Could the Interest Rate Hikes Influence Car Payments?
When it comes to calculating a monthly payment for a new vehicle, just a bump of one quarter point in the interest rate can mean an extra $8 to $20. Over the course of a year, that could potentially mean an extra $240 for a car buyer.
That can be enough to sway some buyers away from a new vehicle, or it can be enough to have them searching for a less expensive new car or cutting options they don’t need but may want, like wheel locks.
The impending interest rate hikes may not be as immediately damaging to new car sales as some analysts fear however. The new tax bill, which was signed recently by President Donald Trump, might put enough extra money into the pockets of consumers that they’ll still consider purchasing new cars over used ones.
In his role at LendEDU, Mike uses data, usually from surveys and publicly-available resources, to identify emerging personal finance trends and tell unique stories. Mike’s work, featured in major outlets like The Wall Street Journal and The Washington Post, provides consumers with a personal finance measuring stick and can help them make informed finance decisions.