interest rates causing slow down on sales?

[GyroRon]

I keep hearing about how auto sales are slowing due to high-interest rates.

Thankfully I am in a position in life where I tend to pay cash for my vehicles these days so interest rates haven't been much of a concern for me. But for the heck of it I went this morning on a loan calculator to see the difference in payment based on what the interest rate would be.

Put in a purchase price of $35,000 total, zero down, 60-month loan. This should be more than enough to cover a purchase of an XL or XLT Maverick, plus taxes and fees. The reality is this total should be a good bit lower for most XL and XLTs... but just using this number as a guideline.

1 percent = $598

3 percent = $629

5 percent = $660

7 percent = $693

9 percent = $726

11 percent = $761

According to google, it looks like the average rate these days on a new purchase is around 6-7 percent. And I can't remember rates ever being much lower than 3 percent or so unless it was a loan through the manufacture done as some sort of incentive.

So to me it looks like the current rates boost the payment by around $50 - $100 more per month.

Are people on that tight of a budget that $100 more per month would keep them out of a new vehicle purchase?

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[cooper]

Yea, $100 a month extra could easily squeeze some families. It's a bit more complicated than that though.

A recent trend, due to new car prices going up so much, is folks taking out 7 year loans on cars and not 5 years or less. So, at 1% you pay $1000 in interest, and at 7% you pay over $7000 in interest over the life of a 7 year loan on $35k.

Also, a lot of new cars are more expensive than a maverick, especially SUV's and larger trucks which are the best selling vehicles right now. This makes a bigger difference on payments.

Also, when rates go up, that can impact all sorts of other things that will put the squeeze on folks (credit cards, home loans, appliances no longer 0%, etc).

Let's do that same math on a new F-150 too...

 

[Jman79]

Are people on that tight of a budget that $100 more per month would keep them out of a new vehicle purchase?

It goes beyond budget and is a question of whether you want to pay more than you would have yesterday. About overall cost of ownership.

Regardless of loan or cash it adds to the overall cost of ownership. I am paying cash and an extra $1200 a year for the first how many years of ownership would surely give me pause, wouldn't it make you pause if I just magically upped your cash price a couple $K?

I for one am glad to see people are coming to their senses a bit about how much debt they carry and how its not just about the monthly payment.

 

[KrisYYC]

Yea, $100 a month extra could easily squeeze some families. It's a bit more complicated than that though.

A recent trend, due to new car prices going up so much, is folks taking out 7 year loans on cars and not 5 years or less. So, at 1% you pay $1000 in interest, and at 7% you pay over $7000 in interest over the life of a 7 year loan on $35k.

This. The interest cost over the term of the loan at today's rates is horrendous. People should be looking at total cost and not just monthly payment. But most people don't, so I'd be surprised if that was a deterrent to the average North American consumer. Likely its that their monthly payments for everything else have gone up too, and/or they may not even be qualifying for auto loans at these new rates. Banks are more tight fisted now than before.

It's even worse here in Canada as our mortgages renew every 5 years. So people who had low rates between 2-3% back in 2018 now have to renew at around 6-7% so their mortgage payment is increasing big time. The longer mortgage rates stay higher the more people have to renew with the higher rates.

 

[Thundercougarfalconbird]

A lot of people are also panicking and missing the other side of interest rates - what you can earn in a CD or savings account right now. Some banks have 1-5 year CDs over 5% right now, with online bank savings accounts in the 4.25-4.50% range.

$35,000 @ 4.25% savings/CD over 5 yrs/60 months = $8,097.13 interest earned (compounded annaully - monthly or daily accounts will add up $100-200 more)
$35,000 @ 6.00% auto loan over 5yrs/60months = $5,598.88 interest paid

Savings total at 5 years: $43,097.13
Loan total at 5 years: $40,598.88
Difference: $2,498.25

So by paying outright cash, even at these higher rates, you actually are losing about $2,500 (and that was 4.25% to err on the current low end). Obviously this comes with the risks that savings interest rates will come down in that time, but if you can spare the cash and make the monthly payment still, locking cash in a 4.5%+ CD that would be the same length of your loan term will earn you money at these higher rates. Those who are savvy investors and can get a 6-8%+ return in the stock market will do even better, though with obviously higher inherent risk. Debt isn't always the enemy people make it out to be, but you have to be smart with it.

As others here have said, many people just look at the monthly and not the total of the loan, but that's focusing on the spending side only too - you still have to account for the potential income from that exact same block of initial cash (this all assuming you have that to start with, of which I am one of the many who do not).

 

[KrisYYC]

A lot of people are also panicking and missing the other side of interest rates - what you can earn in a CD or savings account right now. Some banks have 1-5 year CDs over 5% right now, with online bank savings accounts in the 4.25-4.50% range.

$35,000 @ 4.25% savings/CD over 5 yrs/60 months = $8,097.13 interest earned (compounded annaully - monthly or daily accounts will add up $100-200 more)
$35,000 @ 6.00% auto loan over 5yrs/60months = $5,598.88 interest paid

Savings total at 5 years: $43,097.13
Loan total at 5 years: $40,598.88
Difference: $2,498.25

So by paying outright cash, even at these higher rates, you actually are losing about $2,500 (and that was 4.25% to err on the current low end). Obviously this comes with the risks that savings interest rates will come down in that time, but if you can spare the cash and make the monthly payment still, locking cash in a 4.5%+ CD that would be the same length of your loan term will earn you money at these higher rates. Those who are savvy investors and can get a 6-8%+ return in the stock market will do even better, though with obviously higher inherent risk. Debt isn't always the enemy people make it out to be, but you have to be smart with it.

As others here have said, many people just look at the monthly and not the total of the loan, but that's focusing on the spending side only too - you still have to account for the potential income from that exact same block of initial cash (this all assuming you have that to start with, of which I am one of the many who do not).

Not sure about your area but where I live insurance rates are a fair bit higher if there's a lien on the vehicle due it being financed which would likely wipe out most of difference over a 5 year term.

 

[huunvubu]

I keep hearing about how auto sales are slowing due to high-interest rates.

Thankfully I am in a position in life where I tend to pay cash for my vehicles these days so interest rates haven't been much of a concern for me. But for the heck of it I went this morning on a loan calculator to see the difference in payment based on what the interest rate would be.

Put in a purchase price of $35,000 total, zero down, 60-month loan. This should be more than enough to cover a purchase of an XL or XLT Maverick, plus taxes and fees. The reality is this total should be a good bit lower for most XL and XLTs... but just using this number as a guideline.

1 percent = $598

3 percent = $629

5 percent = $660

7 percent = $693

9 percent = $726

11 percent = $761

According to google, it looks like the average rate these days on a new purchase is around 6-7 percent. And I can't remember rates ever being much lower than 3 percent or so unless it was a loan through the manufacture done as some sort of incentive.

So to me it looks like the current rates boost the payment by around $50 - $100 more per month.

Are people on that tight of a budget that $100 more per month would keep them out of a new vehicle purchase?

Also the price of the Maverick and other vehicles have gone up because of inflation.

The Maverick Hybrid price has increased by $2,580 in two model years just for the Hybrid powertrain by itself.

In MY22 the Hybrid powertrain was $1,080 less than the FWD EcoBoost
In MY23 the Hybrid powertrain was the same cost as the FWD EcoBoost
In MY24 the Hybrid powertrain is $1,500 more than the FWD EcoBoost

That works out to be a $2,580 increase in cost in two model years

 

[Thundercougarfalconbird]

Not sure about your area but where I live insurance rates are a fair bit higher if there's a lien on the vehicle due it being financed which would likely wipe out most of difference over a 5 year term.

I haven't run into that in states I have lived, but I could see that being a factor where an insurance company would require higher/full coverage for a financed vehicle or require some type of gap insurance. Most of the states I have lived in have already required a high level of coverage as the minimun, so I have never personally experienced that. I acutally saved on my previous auto loan, as it was through my insurance company and they provided complementary gap insurance and a rate reduction for having both insurance and the loan through them.

 

[Don806]

I financed before (Oct 22) the rates jumped up a lot (3.9% for 60months) and put the cash in 2 one year CD's at 4.15%, the highest rate was 1yr, plan to renew at the highest rate when they come up. I do think the current interest rates turn some folks off of vehicle purchases, but also some folks also only look at the monthly payment?

 

[jsus]

Are people on that tight of a budget that $100 more per month would keep them out of a new vehicle purchase?

When it's $100 more in interest every single month, and $100 more in price hikes every single month, yeah, that adds up. Now you're spending ~1/3 more for the same exact vehicle, over the life of the loan.

 

[whizwart]

I have a 2024 XL Hybrid on order. I was really disappointed in the price increase for the model year, and doubly so for the extra hybrid since the price point had been the big attraction for me. Had I had to pay $500 more off the sticker prices, I likely would not have been able to buy now due to the interest rates and my down payment budget not being what it should (my 2014 Focus' transmission finally exploded after being trouble free for years). I know some folks look at $100 bucks and go "what's the diff?", but it really can make a huge difference in some budgets. The back up has always been the used marker, but that's been emptied out over the last few years. On a side rant, it bugs me that most automakers have pretty much left the lower end of the market. I get that getting the best return per unit lends itself to pricier models, but thats why there was such a rush on the Maverick. It's the only car I know of for quite awhile that has actual potential as a family car given the utility of having a bed (a small family, I grant you). Now compare that with the cheapest new minivan, the KIA Carnival, starting at $34,500. There's just not any good options.

 

[Taxman100]

I have a 2024 XL Hybrid on order. I was really disappointed in the price increase for the model year, and doubly so for the extra hybrid since the price point had been the big attraction for me. Had I had to pay $500 more off the sticker prices, I likely would not have been able to buy now due to the interest rates and my down payment budget not being what it should (my 2014 Focus' transmission finally exploded after being trouble free for years). I know some folks look at $100 bucks and go "what's the diff?", but it really can make a huge difference in some budgets. The back up has always been the used marker, but that's been emptied out over the last few years. On a side rant, it bugs me that most automakers have pretty much left the lower end of the market. I get that getting the best return per unit lends itself to pricier models, but thats why there was such a rush on the Maverick. It's the only car I know of for quite awhile that has actual potential as a family car given the utility of having a bed (a small family, I grant you). Now compare that with the cheapest new minivan, the KIA Carnival, starting at $34,500. There's just not any good options.

Yep - I purchased the Maverick to take the place of our 12 year old minivan - it is starting to rack up some pricey repairs, and it gets relatively poor fuel economy. If I can get it out of my wife's hands, that is.

 

[Taxman100]

A lot of people are also panicking and missing the other side of interest rates - what you can earn in a CD or savings account right now. Some banks have 1-5 year CDs over 5% right now, with online bank savings accounts in the 4.25-4.50% range.

$35,000 @ 4.25% savings/CD over 5 yrs/60 months = $8,097.13 interest earned (compounded annaully - monthly or daily accounts will add up $100-200 more)
$35,000 @ 6.00% auto loan over 5yrs/60months = $5,598.88 interest paid

Savings total at 5 years: $43,097.13
Loan total at 5 years: $40,598.88
Difference: $2,498.25

So by paying outright cash, even at these higher rates, you actually are losing about $2,500 (and that was 4.25% to err on the current low end). Obviously this comes with the risks that savings interest rates will come down in that time, but if you can spare the cash and make the monthly payment still, locking cash in a 4.5%+ CD that would be the same length of your loan term will earn you money at these higher rates. Those who are savvy investors and can get a 6-8%+ return in the stock market will do even better, though with obviously higher inherent risk. Debt isn't always the enemy people make it out to be, but you have to be smart with it.

As others here have said, many people just look at the monthly and not the total of the loan, but that's focusing on the spending side only too - you still have to account for the potential income from that exact same block of initial cash (this all assuming you have that to start with, of which I am one of the many who do not).

True, but one would hope that person not paying $675 a month towards a vehicle is instead putting that into a money market fund earning 4.25%, rebuilding their cash.

If you start at $0, and invest a cash stream of $675 a month earning 4.25% compounded monthly, I come up with $4,695 of interest earned over 60 months.

Attached - I calculate that cash stream invested at 4.25% earning a total of $4,600 income.

 

[Thundercougarfalconbird]

True, but one would hope that person not paying $675 a month towards a vehicle is instead putting that into a money market fund earning 4.25%, rebuilding their cash.

If you start at $0, and invest a cash stream of $675 a month earning 4.25% compounded monthly, I come up with $4,695 of interest earned over 60 months.

Attached - I calculate that cash stream invested at 4.25% earning a total of $4,600 income.

That is true and a valid method as well. I think that would fall between my two scenarios in terms of risk, as you can start with a higher principal earning full interest now and locked at a rate with a CD, or you build it up over that time but now you're at the whim of the market if rates change (which could be even better in that scenario if rates keep going up instead of the person who is stuck at their CD rate).

Unfortunately, I think you have a lot of folks who may not see paying in cash up front as a way of commiting to $675 away a month though. It's far too common to see some one pay something off and suddenly they have "extra" money for a lifestyle inflation. It all really comes to each person needing to find what scenario is best for them and actually putting in the time and the math for all options.

 

[commadorebob]

A lot of people base their vehicle affordability based on the monthly payment not the price of the vehicle. That $100 is literally the difference between insuring my Honda CRV and insuring my Honda CRV with a 16-year-old girl.

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