Interest rate surge drives US car loan payments to record high

Stay informed with free updates

Simply sign up to the Automobiles myFT Digest — delivered directly to your inbox.

US consumers who borrowed money to buy a new car are on the hook for record loan payments, with one in five owing at least $1,000 a month, as surging interest rates combine with costly inventory to make vehicles less affordable.

The rising cost of financing is bad news for carmakers, as some customers shun more profitable trucks and sport utility vehicles for cheaper models. It comes as higher interest rates spread through the consumer economy, from mortgages to credit cards to car loans.

The interest rate on loans averaged 7.4 per cent in the third quarter, the highest it has been since 2007, according to car research group Edmunds. The average monthly payment of $736 was a record high, while the share of car buyers paying at least $1,000 a month reached nearly 18 per cent.

New cars, trucks and SUVs are continuing to sell, buoyed by unmet demand from a supply crunch that began in the pandemic, but prices are lofty.

“Affordability has been such a big factor this year,” said Edmunds analyst Jessica Caldwell. “The pent-up demand will carry the sales rate, but it’s just going to be people replacing their vehicles or people who are more affluent . . . We’re seeing demand for lower-priced vehicles, which we have not seen in awhile.”

Higher financing costs come as the United Auto Workers union enters its fourth week of a strike against Ford, General Motors and Stellantis, the three big Detroit carmakers. Continuing walkouts could lead to depleted car supplies, but higher prices and interest payments threaten to hit demand.

“Prices are a function of supply and demand,” said Bank of America analyst John Murphy. “A weaker demand picture could offset the supply-side shock.”

The UAW has rolled out the strike gradually since September 15, with more workers at more facilities joining each week. That piecemeal approach meant the effects on inventory are so far “negligible”, said Jonathan Smoke, chief economist at Cox Automotive.

Interest rates, on the other hand, are the car industry’s “public enemy number 1”, along with credit availability and the overall economy, he said. “These are not good signs for demand continuing to be strong or improving in the fourth quarter.”

At Ally Financial, which has a large car lending business, Doug Timmerman, president of dealer financial services, said in a memo last week that it had made “the difficult decision to reduce expenses through headcount reduction” and would offer buyouts to some employees. Detroit-based Ally originated $9.8bn in consumer car loans in the second quarter, down 21 per cent from $12.4bn a year before.

A spokesman acknowledged a “challenging macro environment” and said the cuts affect less than 5 per cent of its workforce.

Smaller cars with a cheaper sticker price are moving off dealer lots faster than more expensive ones. Compact models such as the Toyota Corolla and Honda Civic have become popular, Caldwell said, a shift from US consumers’ preference for fully loaded trucks and SUVs during the era of low interest rates. The shift has also accompanied a recent rebound in petrol prices at the pump.

In August 2021, dealers had a 28-day supply of vehicles selling for more than $50,000, and a 32-day supply of vehicles priced beneath that threshold, according to Edmunds’ data. Two years later, the supply of vehicles less than $50,000 is selling out in 26 days, while more expensive cars and trucks linger for 40 days.

Carmakers have raised incentives to tempt more buyers into the market. Discounts — whether through leasing deals, special financing rates or cash rebates — averaged $2,365 in August, the highest they have been all year, according to Cox Automotive-owned Kelley Blue Book. Still, they remain historically low, accounting for 4.9 per cent of the average transaction price, compared with pre-pandemic norms of about 10 per cent.