Auto loans broke the $700 level in July for the first time ever because consumers fueled their desire for bigger new vehicles as prices skyrocketed since the start of the global pandemic.
Smaller discounts from auto dealers along with rising prices for cars and interest rates for loans have thrust monthly payments into the $700 level, said Thomas King, president of the data and analytics division at J.D. Power, a Troy, Michigan-based data analytics company.
“The average monthly finance payment in July is on pace to hit a record high of $708, up $81 from July 2021,” he said.
High monthly auto loans are a result of consumers seeking larger, costly cars and pickup trucks along with longer auto loans, Greg McBride, chief financial analyst for Bankrate, a New York-based financial data company, told TheStreet.
“We’re at $700 because of the decades long desire for ever larger and more expensive vehicles and the compounded effect of slower principal paydown on longer-term loans that then leads to much less equity to be used as a down payment on the next vehicle or worse, rolling in negative equity,” he said.
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Supply Chain Issues Limit Amount of Cars For Sale
The main reason auto loan amounts have soared is because the number of cars for sale remains compressed as supply chain issues have impacted the production of semiconductor chips that are used for vehicles.
“Limited supply on dealer lots has driven up sticker prices and loan amounts to levels previously unseen,” McBride.
Even though interest rates for auto loans have risen because of the rate hikes from the Federal Reserve, they are not the reason auto loans reaching $700 a month, he said.
“Rising interest rates don’t help, but are not the primary culprit,” McBride said. “The difference between a 4% rate and a 6% rate on a $40,000 loan is $37 per month – pretty modest impact when we’re talking about monthly payments in the $600-$700 neighborhood.”
The average monthly payment for a vehicle rose by 12.8% from a year ago, which is above the 12.3% increase in transaction prices, marking the first month since December 2019 that the percentage growth of monthly payments exceeded the percentage growth in transaction prices, according to preliminary data from J.D. Powers and LMC Automotive.
Interest rates for new auto loans continue to accelerate and are expected to increase 1.04% from a year ago to 5.31% in July, according to the data.
In May, Jeff Wohlrab, a retired Air Force veteran and author, helped his daughter purchase a 2022 Mitsubishi Mirage after her previous automobile was totaled in an accident.
The interest rate for the auto loan is 5.03% because she lacks a credit history.
“We put down 70% in cash and did the rest on a three-year loan to build her credit,” he said. “We paid under MSRP and the $2,000 dealer markup was waived.”
Fewer cars were purchased in July as consumers bought 988,400 units, a 10.8% decrease compared with July 2021 because there is one less selling day compared to last year, according to preliminary data from J.D. Powers and LMC Automotive. Total new-vehicle sales for July, which includes retail and non-retail transactions, are projected to reach 1,159,700 units, a 5.7% decrease from July 2021.
Prices for new vehicles continue to “hover near record levels with the average transaction price expected to reach $45,869—a 12.3% increase from a year ago” and the second highest on record, King said.
Reprieve in Car Prices Likely
Consumers could see a reprieve in car prices as the production for semiconductor chips improves, especially for the automotive industry.
Several companies using semiconductor chips, such as Logitech (LOGI), have estimated improvements from supply chain disruptions by the third or fourth quarter.
Taiwan Semiconductor Manufacturing (TSM) and NXP Semiconductors (NXPI) reported their automotive chip business increased by 14% year-over-year and 36% year-over-year, respectively.
Meanwhile, auto manufacturer General Motors (GM) maintained its full year guidance and production despite setbacks during the second quarter with China’s shutdowns.
“They cannot book revenue without shipping cars to dealers and cannot ship cars to dealers without chips,” Thomas Hayes, chairman of Great Hill Capital in New York, previously told TheStreet.
The constraints in shipping semiconductor chips are subsiding.
“The chips have started to flow in the last few weeks,” Hayes said. “As we fulfill the backlog in new cars, used car prices will come down hard, which is a key component in the Consumer Price Index (CPI).”
Demand for cars, SUVs and pickup trucks remains high compared to smartphones and computers.
“The decline in demand for PC and electronics has opened capacity to begin to meet auto demand,” he said. “The huge backlog for auto demand can now start to get filled. GM sounds pretty confident it will.”
