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Projected Interest Rate Hikes for 2018 Could Make Automotive Loans More Expensive

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Rising interest rates could potentially add to the projected decline of new vehicle sales in 2018


Those who want to take out an auto loan should be prepared to hand over more money in 2018

Late last week, The News Wheel reported that new vehicle sales were set to fall short of 17 million units in 2018. That projected sales decline is due to a variety of reasons.

Analysts are now adding another reason to the list, as the Federal Reserve has predicted three interest rate hikes for this year.

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The Federal Reserve raises interest rates to keep the economy in check. Without increasing interest rates, high inflation could cause major damage to the economy.

The projected quarter-point increases to interest rates nationwide could add anywhere between $8 and $20 to monthly new car payments. Experian lists the average monthly payment for a new vehicle as $495.

used car price sticker

The used car market might just see a boost from increasing interest rates

Multiple price hikes added to interest rates might convince consumers to downsize on their next vehicle, removing luxury features or even switching to a smaller segment. Another side effect might involve those consumers flocking to used vehicles instead.

“The monthly payment matters,” said Jonathan Smoke, chief economist for Cox Automotive. “When rates rise, many consumers do not have an option to pay more. We believe higher rates have already led the automotive market to see some shift” toward used-vehicle purchases instead of new ones.”

Consumers won’t be the only ones affected by rising rates. Higher rates increase the cost needed to provide low-rate financing, eating into the profit margins of major automakers.

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Of course, the same amount of interest rate hikes took place during the course of 2017, a year where the number of automotive loans reached record-high amounts. Furthermore, today’s automotive interest rates are far lower than they were even 10 years ago, when vehicle sales were  rather robust and healthy.

Many analysts predict that the added spending power created by the recently-passed tax-reform bill will counteract the added costs that any increasing interest rates create. Nevertheless, monthly payments that cost more certainly won’t attract additional consumers to a new car market that is set to decline.

News Source: Automotive News (subscription required)