Used vehicle prices have increasingly become a barometer for inflation since early last year when the Biden administration blamed the market for rising inflation rates. Last month, the consumer price index rose by 0.4%, primarily driven by surging prices in housing, used vehicles, and gasoline. This article delves into the factors contributing to these inflationary trends, especially the impact of rising interest rates on the affordability of vehicles. The Perfect Storm: Rising Interest Rates and Vehicle Prices The recent surge in interest rates compounds the challenge of already-high vehicle prices, which have been driven up by a constrained supply of both new and used vehicles.
This issue stems from the inventory squeeze that began in 2020 due to factory shutdowns resulting from the coronavirus pandemic and ongoing supply chain disruptions. “You can call it a double whammy. High prices and higher interest rates are just making those monthly payments go up,” said Chris Frey, senior industry insights manager at Cox Automotive. With a typical subprime auto loan rate standing at a staggering 17.9%, the monthly payment on a $43,200 loan for a new vehicle would reach $983, according to Cox estimates.
This contrasts starkly with the $720 monthly payment for a buyer with an excellent credit score rate of 6.2%. Long-Term Impact: Elevated Vehicle Prices Regardless of what happens with interest rates, whether the Federal Reserve continues to raise them or opts for a pause, vehicle prices are projected to remain elevated for the foreseeable future. The road to recovery will be a gradual one, as it takes time to rebuild inventories and for new vehicles to transition into the used car market. “It’ll take some time, but right now it looks like prices are going to hold. So that friction against those subprime or lower-income, credit-challenged buyers is going to remain,” Frey said. “It’s just going to take some time. If there’s any word I would put to describe what needs to be held by consumers, it’s simply patience.
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