Editor's note: This updated report contains analysis from Cox Automotive, Edmunds, KAR Auction Services and the National Automobile Dealers Association.

New-vehicle prices and financing costs approaching a 10-year high are making the task of delivering new models more of a challenge for franchised dealerships.

And experts now are wondering when automakers might turn up the incentive dial to keep new vehicles appealing before a potential buyer switches to a used-vehicle option or worse — not making a purchase at all.

Edmunds highlighted that shoppers looking to get a break from rising interest rates didn’t find it in March as the average interest rate on a new vehicle loan hit its highest level in a decade.

According to an Edmunds report released on Tuesday, the annual percentage rate (APR) on new financed vehicles is expected to average 6.36 percent in March, compared to 5.66 percent last year and 4.44 percent five years ago.

Edmunds analysts noted that buyers were able to find more zero percent finance offers in March compared to the first two months of the year, but these deals are much harder to come by than they have been historically. About 4 percent of all financed deals in March had zero percent interest rates, compared to 7.44 percent last year and 7.59 percent in 2014.

“Things just keep getting tougher for new-car shoppers,” Edmunds executive director of industry analysis Jessica Caldwell said. “Interest rates have crept up every month so far this year, and new vehicle prices continue to hover near record highs.

“We’re on the cusp of what could be a pretty dramatic shift in the market, simply because a big chunk of buyers are getting priced out,” Caldwell said.

Meanwhile, the valuation analysts at Kelley Blue Book reported on Tuesday the estimated average transaction price for a light vehicle in the United States was $36,733 in March. New-vehicle prices increased $824 (up 2.3 percent) from March of last year, while decreasing $174 (down 0.5 percent) from last month.  

“Prices climbed more than 2 percent year-over-year in March, led by full-size trucks, where half of the models are new,” Kelley Blue Book analyst Tim Fleming said. “While a 2-percent increase doesn’t sound like much, factoring in higher interest rates this year and tighter incentives means average monthly payments are up about $30 from a year ago — an increase closer to 6 percent.

“This sharp increase is likely contributing to the slower sales pace in the first quarter. We will have to see if automakers respond with greater incentives later in the year, if sluggish sales continue,” Fleming added.

National Automobile Dealers Association senior economist Patrick Manzi mentioned in analysis shared on Monday that incentive spending is down compared to the same period a year ago. However, Manzi acknowledged the situation could change.

“We expect more discipline from automakers with incentive spending throughout the year,” Manzi said. “According to J.D. Power, average incentive spending per unit is down $119 to $3,821 through March 2019. Incentive spending has been reduced more on car models than light trucks.

“If inventory levels get to too high, we may see incentive spending pick up to help clear out dealer lots,” he went on to say.

Cox Automotive chief economist Jonathan Smoke elaborated about some of those points, adding that used vehicles are becoming a more appealing option.

“The weakness in auto sales so far this year has been on the retail side. Incentives remain relatively low and auto loan rates have not improved, so consumers haven’t had a compelling reason to buy. This market looks like it’s heading into a normal, post-peak slowdown that was temporarily disrupted last year by tax reform,” Smoke said.

“The pool of people who can afford to buy a new vehicle is being reduced by higher prices and affordability concerns, and we’re likely seeing signs of that in the sales numbers,” he continued. “So far this year, average new vehicle loan payments are up 3.5 percent compared to last year, to $567, and average lease payments are up 2.8 percent to $500.

“As a result of multiple years of rate and price inflation, new vehicles payments have become a big hurdle, driving people into used cars, where the average loan payments is $414, up less than 1 percent from a year ago,” Smoke went on to say.

Edmunds mentioned that in the first quarter of this year, an increasing number of vehicle buyers are being pushed into higher financing brackets. Edmunds data reveals that shoppers receiving interest rates of 10 percent or higher constituted 14.1 percent of the market in March, the highest level seen since February 2008.

“It’s pretty alarming to see that a sizable segment of new-car shoppers are financing cars at rates that we’d normally associate with used vehicle purchases,” Caldwell said.

“The good news is that the Fed has halted rate hikes for now and we’re edging closer to the summer sell-down season when the number of incentive offers starts heating up,” she continued. “But without automakers stepping in to offer a reprieve, interest rates around 6 percent are likely the new normal.”

Finally, KAR Auction Services chief economist Tom Kontos did even more investigation and arrived at assertions that might intrigue both dealerships and finance companies.

“I have done calculations of the payment threshold for U.S. consumers using median income levels and found that current new vehicle loan payments according to Edmunds are already above that threshold (approximately $525/month),” Kontos said in a message to SubPrime Auto Finance News. “This reinforces my belief that there will be strains on new vehicle affordability, especially as consumers have pretty much maxed out on term and down payment (with down payment facing pressure from softening used car/trade-in values). 

“This will drive people to purchase ‘less car,’ i.e., shift to smaller vehicles or back to cars from trucks, or vehicles with less content; or move into the used vehicle market,” Kontos went on to say.

New-Car Finance Data

Used-Car Finance Data

Source: Edmunds