As the Federal Reserve mulls interest-rate decisions for 2019, Edmunds explained that December’s auto finance data reinforced how 2018 represented a “tipping point.”

Analysts indicated interest rates for new vehicles dipped slightly for a second consecutive month in December. But for used vehicles, the exact opposite happened as the rate jumped a full percentage point year-over-year.

The annual percentage rate (APR) on new vehicles financed during the closing month of the year averaged 5.9 percent in December, compared to 6.0 percent in November and 6.2 percent in October.

For used-vehicle financing, Edmunds indicated the average APR climbed from 7.66 percent to 8.66 percent as the average amount financed topped $22,000.

Edmunds noted that low interest rate finance deals on the new-car side can be attributed to this overall month-over-month dip. According to Edmunds data, 14 percent of buyers received rates below a 2-percent APR, compared to 12 percent of buyers receiving the same rates in November.

“Holiday sales gifted car shoppers with another slight respite from record high interest rates in December, but in many ways this month was a curtain call for robust finance deals,” said Jeremy Acevedo, Edmunds’ manager of industry analysis.

“With the holidays behind us and the most recent Fed rate hike kicking into effect, automakers won’t be as inclined to move mountains in the new year, so shoppers can expect average APRs above 6 percent to be the new normal,” Acevedo continued.

Edmunds noted that reliable incentives such as zero percent finance deals have all but dried up, threatening to derail industry sales in 2019. According to Edmunds data, zero percent finance loans remained flat month-over-month, but at 5.5 percent hit their lowest December level since 2005.

Also of note from the new-car perspective, ALG estimated average transaction prices (ATP) for a new light vehicle was $35,145 in December, up 1.3 percent from a year ago. ALG added average incentive spending per unit declined by $223 to $3,746. The ratio of incentive spending to ATP is expected to be 10.7 percent, down from 11.4 percent from a year ago.

While the rate movements on the new-model side might be more active, Edmunds also pointed out that the average APR for used-vehicle financing climbed only 16 basis points between December 2013 and December 2017.

No matter what happens within the dealership finance offices and finance company underwriting departments, how the Federal Reserve operates in 2019 will be an overarching influencer. Policymakers have moved interest rates higher more than a half dozen times during the past 24 months.

But at least one member of the Federal Open Market Committee thinks it might be time for the Fed to get to he defined as a “neutral rate.” Robert Kaplan is president of the Federal Reserve Bank of Dallas.

Kaplan explained back in October that the neutral rate is the theoretical federal funds rate at which the stance of Federal Reserve monetary policy is neither accommodative nor restrictive.

At the time of his analysis with the U.S. unemployment rate at approximately 3.7 percent and the headline personal consumption expenditures (PCE) rate of inflation at slightly more than 2 percent, Kaplan stressed that, “I believe that the Federal Reserve is achieving its dual-mandate objectives.”

He continued, “As we reach our dual-mandate objectives, I believe that the Federal Reserve should be gradually easing off the accelerator — we no longer need to be stimulating the U.S. economy. As such, I believe we should be gradually and patiently moving toward a neutral policy stance.”

The Fed meets again beginning on Jan. 29, giving the auto finance industry the first glimpse of the year to see if policymakers will follow Kaplan’s suggested course.

“Rising interest rates will be one of the biggest factors influencing how the auto market fares in 2019,” Acevedo said. “Access to cheap credit has been a staple of the post-recession auto market, and 2018 marked a tipping point for the industry.

“Interest rates in 2018 closed more than a point higher than they closed 2017, and rates are only going to continue to trend upward, which poses a real threat to shopper demand as we head into 2019,” he went on to say.

New-Car Finance Data

Used-Car Finance Data

Source: Edmunds