The continued lowering of interest rates over the last couple of years was a bit of a salve to a car market stretched by supply shortages, trimflation, tariffs, and other pressures. While buying a car hasn’t gotten dramatically cheaper, it’s still been feasible. How will rate increases hit affordability?
If yesterday’s Morning Dump was an attempt to see the light at the end of the tunnel, today’s TMD is a little more focused on the tunnel itself. A rate hike is basically the last thing anyone wants, even if it’s the sensible thing to do given market conditions. And, wow, market conditions are bad. There’s a new editorial out that enumerates all of the problems.
It could get worse, right? The car industry in Germany is what it looks like if it gets worse. And who is waiting in the wings? China, of course.
The Ripple Effect Of Rate Hikes Is Real
Above is a graph, via my dear friend FRED, of the Bankrate Monitor Auto Loan Rate for a 60-month new car loan (specifically, a $33k loan for someone with a 700 FICO score and a 10% down payment). You can see the impact of pandemic era interest rate policy, as well as the large climb as the fed attempted to fight inflation.
Also at play are the last couple of years of small rate cuts from the Federal Reserve as it had to contend with an economy where nothing feels like it’s getting cheaper, and with an AI development boom that has overheated markets. The Federal Reserve’s Federal Open Market Committee (FOMC) unanimously approved a 0.25 percentage point increase to the federal funds rate (the amount charged by banks to loan excess reserves to other banks).
Here’s what the FOMC said:
Economic activity is expanding at a solid pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little.
Inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability.
The FOMC wants to keep the economy growing and unemployment low, but it also wants to do so while holding the line on inflation. While this rate doesn’t directly tell a lender what it can charge for an automotive loan, it eventually does impact how much it costs to lend/borrow money. If the fund rate is super low, lenders can generally afford to lower the rates for borrowers.
Obviously, carmakers can lower the price of loan whenever they want via captive financing arms, and will sometimes offer 0% financing if it’s determined that the cost/risk of the loan is offset by the value of selling the car. The chart above is just an average, as your own individual rate will depend a lot on your credit score, your down payment, and general market conditions.
This hike could hit the car market twice. The most obvious impact is on buyers, who could see borrowing costs start to creep up again. What car buyers often forget is that dealers are also borrowing money for the cars in their showroom (this is called a floorplan loan). That’s both good and bad. If dealers have to pay more to keep a car on the floor, they’ll try to capture that extra cost in a sales price. At the same time, a dealership may be more motivated to move a car before it has to pay more to keep it in inventory. If rates go up and remain elevated for long enough, this can lower the number of cars dealers want to order, which then causes prices to go up.
Dealers and automakers want to shield buyers from this as much as possible, and they have some tools, as our pal Jessica Caldwell tells Automotive News:
The Fed’s rate increase will not ease auto affordability challenges, but seasonal rate promotions toward the end of the year could balance out the impact, Caldwell said. It’s difficult to know, however, whether or how much consumer or political pressures factor into the Fed’s rate decisions.
“Affordability is at the top and center for most American families,” she said. “Having an interest rate hike isn’t good optics.”
Even if automakers can offer lower financing, and are willing to absorb the risk/cost, the fear is that consumers will hear the words “interest rate hike” and immediately shy away from dealers even if some are offering good rates.
Here’s A List Of All The Challenges Facing The Car Market
The Automotive News Editorial Board has decided to weigh in on whether or not Widow’s Bay is a comedy or a drama and, as good people, have agreed that it’s obviously a comedy. Oh wait, never mind, they are responding to the interest rate hike by reminding everyone of how tough it is out there.
In addition to the rate hike, other problems include:
- A monthslong war in the Middle East limits access to global crude oil supplies.
- A yearslong war in Europe disrupts global diesel refining capacities and drives up fuel costs for goods deliveries worldwide.
- The U.S. administration has abandoned decades of free trade philosophy, imposing protectionist tariffs on allies and adversaries alike.
- Unprecedented private-sector borrowing to fund artificial intelligence data center build-outs drives up capital costs for all debtors — including the federal government, which hasn’t balanced its own budget in 25 years.
Does the Board suggest a solution? It doesn’t. The enumeration of problems is enough. It could be worse though; we could all be living in Germany.
The German Car Industry Must Hang Together Or Surely They Will Hang Separately
Almost exactly two years ago, I used a TMD to ask “How screwed is the European car industry?” and the answer seems to be: still pretty screwed. And that was before tariffs. Germany is in a particularly rough way, with a new report from Manager Magazin indicated that Germany could lose tens and hundreds of thousands of jobs in the coming years.
Is there a way out? If so, it’ll require some interesting cooperation:
Mercedes CEO Ola Källenius (57) had a surprising message. He told the parliamentary group leaders of the CDU/CSU and SPD, who had invited him to their two-day workshop in Münster at the end of August, that he had always been a bit of an economic policy freak: a believer in the free market, no friend of subsidies. But now he had changed his mind: “This can’t go on,” one participant quoted him as saying.
Together with IG Metall chairwoman Christiane Benner (58), Källenius was to brief members of parliament on the situation of the German automotive industry. Unusually united, the two advocated for industrial policy support during the meeting; the state should help the companies. And they were heard. In the four-page resolution paper that the politicians ultimately agreed upon, there are 20 lines entitled “We remain a car nation”: The federal government will therefore strongly advocate for “local content quotas” for cars sold in Germany and Europe, for continued sales promotion of electric cars and models with partially electric drives, and even announced an explicit “commitment to a technology-neutral transition” within the EU.
Everyone loves the free market when the invisible hand is passing out money, and a little less when it’s handing out slaps.
All Your Factories Are Belong To BYD
You know who might want all of that excess European factory capacity? A little company called BYD, according to Bloomberg:
The manufacturer is targeting three vehicle assembly factories as well as one electric-vehicle battery plant in the region, Alfredo Altavilla, a former Fiat Chrysler manager who advises BYD in Europe, told reporters at an event in Turin late on Wednesday.
“This is not for tomorrow morning, but it’s clear that to reach the volume objectives we have and at the same time become compliant with EU rules, this is what we’ll need,” Altavilla said.
BYD has been holding talks with European competitors and governments as it explores taking over underutilized factories in countries including France, Spain and Italy. The European Union has introduced tariffs on Chinese-made EVs and the bloc’s proposed “Made in Europe” rules are expected to increase pressure on BYD to bolster capacity in the region.
It’s quite the bargain for countries, though it’s easier for the ones who don’t rely on China as an export market.
What I’m Listening To While Writing TMD
Feeling Bay Area today, so please enjoy “Feelin’ Myself’ from the too-soon-gone Mac Dre.
The Big Question
What’s the highest interest rate you’ve paid for a car?
Top photo: FRED, Honda
The only thing I plan to ever finance is land, now that my student loans are gone. Cars will always be cash only.
Highest I’ve paid was about 6%, though between a big down-payment and paying the rest off in something like 2-3 years instead of 5, I definitely didn’t pay anything like the calculated total.
Only once borrowed for a car for an incentive , got 6% then paid it off the next month.
“What’s the highest interest rate you’ve paid for a car?”
I’ve always bought cars for cash, used.
Except the one time I leased a new Benz in the late ’90s through my business.
I don’t think I’d ever finance a car, unless the interest rate was so low that it’d cost me more if I didn’t finance the car. As I’m disinclined to buy a new car lately, it’s moot.
The only loan I ever got for a car was for the only new car I ever bought, a 2002 Mazda Protégé5 in Silver, 5MT. Perfect specs. No clue about the interest rate, but when I sold it after about a year it covered the remainder of the loan and gave me about $2K in cash as well. Wish I still had it.
Maybe 5% (I think it was 4.5 or 4.75). I’ve had good luck, good timing, and good credit each time I have purchased. When I had that loan, I was also collecting more interest than I was paying. When rates came down a bit on my savings, I paid off the loan.
I have a 20-year-old working for me who just bought a used car. 19.99%. I could have put the car on my credit card for less. And I’m told someone else here had a 25% rate on a car loan. She ended up like $10k underwater on a car worth $5k. It’s really rough if you have no credit or bad credit, need a car, and don’t have much cash on hand.
Meta is currently running a long, slick ad for AI on television, featuring a Bowie song.
It says they believe in people.
The song Five Years is an interesting choice
I don’t particularly want a low interest rate right now, but in a year or so when I’m thinking of replacing my car, definitely going to want it to go lower.
Obviously a higher rate is going to impact businesses and their ability to borrow money, so you might see more layoffs as they decide they can’t borrow or invest in projects they had planned to do.
I once financed a vehicle without knowing or caring about the interest rate.
When I bought my 2003 Chevy Tracker in 2004, I was forced to finance it through GMAC. The sticker price was $21,900 but they had it marked down to $14,800 due to it being a 5-speed previous-year model and still on the lot. They then offered me an additional $1K off for their “Truck Month” promotion.
I had $3,000 built up in GM Card earnings, which would have brought the price down to $10,800.00 for a brand new, almost $22K vehicle. I had saved up and was planning on writing a check for it, but in order to take off the additional $3K, I absolutely had to finance it through GMAC. Their minimum finance amount was $5K.
So I financed $5K and wrote a check for the balance after making sure there was no penalty for paying the loan off sooner than scheduled. I made one payment, then called GMAC for the payoff amount. I sent them a check less than two months after I bought the Tracker.
So the interest rate didn’t really matter in that situation.
When we bought our 2024 Trax LS, the stealership wanted over 7% interest so we just wrote a check for it. Luckily we had saved up for a few years and sold a previous vehicle so we were able to swing it.
Try living with a variable interest rate home loan and having some loser from another country drive up the cost of living, causing uncontrollable inflation increases to which they then make my loan even more expensive.
Meanwhile the ones with true discretionary money to spend are laughing because the interest rates on their savings just went up giving them more money to spend.
AFSN@T^&Thjvjh2!
Is Trump from another country?
Maybe he is in Ukraine and he is talking about Putin.
Actually Putin is responsible for alot of energy price inflation over all of Europe.
Well, he isn’t from my country…
The picture works as well, if not better than the list.
Oh, they count on consumers being that stupid, as part of their profit strategy?
I got 1.99% financing on the car I just bought. Others have been 4% to 7% or so. Credit Unions mostly.
OMFG, there is a dude on the BART right now with an automated Iron Man helmet on, dancing to music. Occasionally he hits a button to close the face mask on the helmet, accompanied by lights and sound effects.
What an amazing world we live in.
Are you a tourist?
Or are you a resident who has been told a million times by the locals that “it is BART not The BART.”
Sincerely, former resident of NoCal, from SoCal.
I’ve only been here a year now, but I ride it 140 minutes a day, so, I’m fine with myself calling it anything I want. But, you are certainly correct.
I was there two years and called it “The BART” just to piss off the locals!
“Frisco”
In my mind’s eye, the soundtrack is by The Prodigy. Mass transit one-person raves are great as long as they stay in the zone.
The lollypop in his mouth was the icing on the cake.
I had a 5% during one of the last credit hikes. The market rate was about 7.5%. I ended up getting a lower rate from a credit union a few months later at 3.2%.
The Germans are done, the French car industry will outlast them because no one can figure out better what the French want then the French. Plus think of the riots if they tried to shut down. The French government would have to give in like they alway do. The rest of everywhere else just wants a reliable car at a good price. At the rate Poland is going I could see some company emerging there from the ashes of the Germans that does well.
First car I bought on credit was a one year old 1999 Prizm and the rate was 9.99%.
I think my first car loan, while I was still in college and had to have my parents cosign for it, was 7%. My next two happened during the 0% fed rate era and I’m sure were lower, although I don’t remember for sure.
I was listening to a financial podcast recently (yes, I’m one of Those People), and one of the guests posited that the Fed raising rates won’t meaningfully affect inflation because this inflation wasn’t driven by monetary policy, it was driven by stupid economic decisions. You can’t monetary policy your way out of a war. It’s important to keep in mind that this was a finance guy, so he is naturally going to want low rates at all times, but I still think he had a point. The inflation will continue as long as the wars and illegal tariffs do.
I find the financial shows strangely soothing while I am working. Then I will update my mortgage spreadsheet for a li’l dopamine hit (I track my future savings as I overpay every month…).
I used to think I had some understanding of macro economics conditions, but not anymore. Too much contradictory info:
Unemployment is low and steady, meanwhile tech companies and others are shedding employees left and right (to the tune of tens of thousands per month) and nobody is hiring. That doesn’t compute.
Spending is strong, though reports are some people are resulting to buy now pay later plans for groceries and other reports say 80% of the spending is coming from the top 10% of earners. How is that indicative of a healthy economy?
Some economists point out if it weren’t for all the AI spending, we’d actually be in a recession right now – AI and Health are the only sectors showing growth, and pretty much everything else is down.
Fuel prices are going up significantly, both directly increasing inflation due to consumer gas/diesel costs and indirectly by cascading into increases in the cost of goods because of the increased transportation costs, so it seems the inflation isn’t due to an overheating economy but rather resource limitations (AKA a “gas shock”). But from the Fed’s view, prices are increasing so inflation is up and thus needs to be tamped down, so they have to raise interest rates. How’s that at all helpful to those of us trying to deal with the price increases?
I’ve lost all sense of what’s rational, and just don’t understand the world today.
The last jobs report analysis I heard said that the major driver of employment right now is in the highly desirable and lucrative field of…food service. People are losing their high paying, cushy white collar jobs and taking a job at McDonalds to make ends meet.
The unemployment numbers are hiding the fact that the job market for desirable positions is so bad people are crawling back to the industry that everyone collectively gave the finger to after COVID.
We need some sort of “gross payroll amount” factor like GDP, so we could capture the reduction in funds going to households caused by such job shifts. Maybe they’ve already got it (non-farm payroll?) but I don’t hear much about it in the news.
So unemployment numbers are sort of like JD power problems per new vehicle, where a job = 1 job without any sort of categorization? Just like a problem = 1 problem, whether it is difficulty with a screen or a catastrophic failure?
Anecdotal evidence to the job market changes.
I work in one of those evil Data Centers that everyone hates right now.
Mine is not AI focused. It is an enterprise data center for a large Fortune 10 company.
We have hired a bunch of the laid off tech workers. Especially coders.
Someone has to deploy all the equipment, then maintain all the equipment, and then decommission all the equipment when it gets old in 2 to 10 years.
Several of the new hires have built us different tools we can use and we are way more efficient than some of my friends who work for other companies.
I think a lot of the laid off tech workers a smart enough to transition into a closely related career field in tech and just keep on marching.
Here’s the thing: If all of the tech workers laid off in favor of AI end up working in AI data centers, what’s the point of AI? We could have just kept paying them to do the work in the first place and skipped the step where we burn enormous amounts of resources building and running data centers.
If (and it’s a big if) AI is successful, it will have to employ far fewer people to maintain the data centers than it displaces from the workforce.
Data center technicians do the physical work, layer 1 of the OSI model. No robots exist (yet) that can do our work. The smart people are taking a job that pays well and is in big demand right now.
Trying to fight the current in a rip tide is futile. You go with it until you can get yourself out of it once it stops taking you out to sea.
Hopefully you don’t drown first.
Some of these layoffs are just companies looking at other companies and seeing that they are laying people off and thinking that they know something they don’t know, so they should do the same.
I’ve heard a lot of speculation that this is just companies who over-hired during and after COVID correcting that mistake, and using AI as a scapegoat. It’s impossible to say for sure what their motivation actually is, but you have to take pretty much anything AI-related with a grain of salt these days.
That is definitely true as well. Interest rates going up is also going to cause companies to rethink projects and whether it’s worth borrowing money to fund them. So that could have an impact as well.
Since generally a company doesn’t have to give a reason why they are doing layoffs(some states do require this), I think in some cases CEOs are grabbing at what is easiest(which also could be to juice their stock) or just not saying anything and thus letting analysts/media make assumptions.
I still remember that highest interest rate well. 12.9% for a 3-year, $3,000 first ever car loan. It was 1999, I was in my last year of college and decided I needed something a bit more reliable to spearhead my hooptie collection. Enter the 1989 Cadillac Brougham. Purchased with 90,000 miles, it was great car. Drove it all over the country during the next couple of years.
I managed to pay it off rather early as I decided to get a Discover card a few months after I bought the Caddy. They called and offered 0% for a year if I had any balances to transfer, no fees. Considering their base-rate was 12.9% at the time, that seemed like a no-brainer. And, it didn’t really matter as I had it paid off less than a year later anyway.
Interestingly I just checked the rate on that same Discover card I still have. If I were to run a balance today it would cost me 15.49%, and I bet they wouldn’t be too keen on a no-fee 0% balance transfer either.
I was 23 years old and bought a 2 year old used car from a Pontiac dealer lot and the interest rate was 15.5% for 48 month loan from GMAC! 🙁
TBQ: When I was 18 and buying my first used car, I wanted to build my credit as it was non-existent. I think it was like 8.5% and I paid six months before paying it all off. So I did lose some money in interest, but it was worth it to establish some payment history.
Honestly, I think the highest rate I’ve ever paid is 3.5% I’ve always had good credit and haven’t had to get a loan recently, so the cars I’ve financed were in an era of cheap credit.
Also managed to refinance the house in the dip and got locked in a 2.875% We switched to a 15-year, so the monthly payment actually went up a little, but over the long term it was an amazing deal.
I’m looking at converting a construction loan to a mortgage here in the next couple of months, assuming we can get the current house sold. We’re counting on the equity in the current place to bring the new mortgage down to a reasonable (maybe less ridiculous) level, but if the current place doesn’t sell, we’ll be hurting.
Meanwhile, interest rates are going up and the mortgage rate is now going to be higher than the rate on the construction loan.
We picked a horrible time to build a new house.
Oof, sorry to hear that!
The last time I borrowed money for a car purchase was 2004, and I don’t remember what the rate was. Used Ranger work truck for $10K. Probably a 4 year loan that I paid off in 2 or 3 years.
I think I’ve only ever borrowed for 3 cars: one new (89 Mazda 323 GTX) and two used (the above Ranger, and a 96 GTI). I also leased a different Ranger when I owned a business. All of these were from dealerships, so I’m sure I got hosed on rates.
It feels like back in those days my income, such as it was, matched up with a lot of used vehicles that suited my needs and wants. Not so much anymore.
The solution is ‘simple’ but also impossible: stop giving all the worst fucking people in the world so much money and power.
TBQ: I’ve always been under 5% but I haven’t had a vehicle loan since 2016 or so? I’ve toyed with getting a 2nd car, new enough to need a loan, then the wife lost their job so that’s definitely not a priority. At least it happened before I pulled the trigger on anything; silver linings I suppose.
Feeling Bay Area today
Me too, every day of my (gulp) almost 60 years here!