SANTA MONICA, Calif. — Interest rates on new-vehicle loans were expected to soar to their highest point in eight years in February, Edmunds said last week. The annual percentage rate (APR) on new financed vehicles averaged 5.2% in February. That’s up from 4.9% in 2017 and 4.4% five years ago.
Edmunds experts point to an expected decrease in the number of loans in the 2% to 3% APR bracket and an expected increase in loans in the 4% to 7% range as the driving force behind this rise in the average.
Because this shift is happening in the mid-range of APRs, it means car buyers who qualify can still find deals, and the market isn't facing a flood of subprime buyers. The percentage of loans with interest rates between zero percent and 2% is expected to remain steady at 22% in February, compared to 21% in February 2017. On the opposite end, the number of loans with interest rates above 7% is also expected to remain steady at 19% in February, compared to 18% in February 2017.
"We're starting to see a trickle-down effect from the rate increases happening at the federal level," said Jessica Caldwell, Edmunds executive director of industry analysis. "The Fed rate hikes directly affect unsubsidized loan rates offered by third-party lending institutions such as credit unions and banks, and, as a result, we're seeing loans that were formerly between 2% and 3% being pushed up into higher APR brackets. Additionally, dealerships can match these independent loan rates brought in by shoppers."
Edmunds analysts say that higher interest rates and near record-high lease returns could also be a contributing factor toward lease penetration levels hitting an all-time high of 33.5% in February.
"Car shoppers tend to have tunnel vision when it comes to their monthly payments," said Caldwell. "As average transaction prices and interest rates rise, we're likely going to see more consumers explore the option of leasing. In some cases, this is a result of consumers simply seeking a way to cut down monthly payments, but for many others, this may be the only option available when they discover that they can no longer afford the costs of a new vehicle."