New-model APR sinks to lowest point of year, coinciding with Fed action
Perhaps it’s just happenstance that Edmunds spotted the average interest rate for new-vehicle financing softening to its lowest level of the year in the same timeframe as the Federal Reserve making its first interest-rate cut in 11 years.
Edmunds reported on Thursday that the average APR on new models financed during July declined for the third month in a row to settle at the lowest point so far this year at 5.84%. That’s down from 6% in June but up from 5.75% in July of last year.
Edmunds data showed that 35% of shoppers who financed their new-vehicle purchases in July got an interest rate below 4%, compared to 31% of those who financed purchases in June.
For used vehicles, Edmunds determined the average APR came in at 8.6% in July, nearly steady compared to the previous month (8.58%) but 30 basis points above the year-ago reading (8.3%).
“Rising vehicle costs and high-interest rates have been placing immense pressure on the new-car market all year, so it’s nice to see shoppers get a bit of a reprieve,” Edmunds executive director of insights Jessica Caldwell said in a news release.
“Consumers are still in for a bit of sticker shock if they’re coming back to the market for the first time in a few years, but the fact that interest rates are trending slightly lower is helping soften the blow,” Caldwell said.
The valuation analysts at Kelley Blue Book reported the estimated average transaction price for a new light vehicle in the United States came in $37,169 in July. New-model prices increased $1,246 or 3.5% from July of last year, while decreasing $312 or 0.8% from the previous month.
“While July is expected to come in below a 17-million SAAR pace, the industry average transaction price continued its steady rise, up 3% year-over-year,” Kelley Blue Book analyst Tim Fleming said. “Trucks were the big story in July as new mid-size and full-size offerings helped to drive truck prices up about 3% while contributing to sales growth in this down market.
“With the new 1500 trucks from RAM and GM that came out last year, full-size truck prices have now eclipsed the $50,000 mark, and new heavy-duty trucks from these manufacturers this year will push those numbers up even more,” Fleming went on to say.
No doubt even with a hefty down payment and modest terms, the monthly payment included in that retail installment sales contract is still likely to be a sizeable amount. Cox Automotive chief economist Jonathan Smoke isn’t too bullish about the Fed’s rate cut opening the financial floodgates for a major growth in finance company portfolios.
“We believe retail new-vehicle sales are not likely to improve this year even with moderately lower rates. Even if auto-loan rates were to come down marginally, the prospective new-vehicle buyer is still contending with the most expensive vehicles ever sold,” Smoke wrote in this blog post.
“It is likely the only way we’ll see retail demand for new vehicles strengthen substantially this year is if we see more rate subvention by the captive finance companies and higher incentives that materially lower payments,” he continued.
“It’s tough to predict where consumer rates will be, but given the Fed shifting policy stance from tightening to easing, the best bet is auto-loan rates will be stable to modestly lower. It takes out the risk of higher rates and therefore removes any sense of urgency to buy sooner than later,” Smoke went on to say.
Turning back to the team at Edmunds, Caldwell noted that one reason average interest rates have dipped is due to automakers and dealers sweetening deals in an effort to clear out lingering 2018 models. Edmunds estimated 3% of new vehicles sold in July were 2018 models, the highest level of outgoing model-year sales of any July in Edmunds’ records, dating back to 2002.
“The fact that there are still 2018 models sitting on dealer lots this far into the year is pretty disconcerting, but at least we’re seeing that automakers and dealers are making a greater effort to get shoppers in the door,” Caldwell said.
Looking ahead, Edmunds analysts projected automakers will likely continue to offer subtle interest-rate incentives over the next few months as the summer sell-down season continues, but dramatic cuts aren’t likely.
Caldwell also noted that the Fed rate cut won’t make much of a real difference to consumers’ wallets either.
“People might hear this news and think this means buying a car just got a lot cheaper, but in reality shoppers aren't going to see much of a difference in their car payment from a quarter percent rate cut,” Caldwell said.
“Even with this move and automaker incentives, we expect to see average interest rates lingering in the 5% territory through the rest of the year,” she went on to say.
New-Car Finance Data
|
July 2019 |
July 2018 |
July 2014 |
Term |
69.6 |
68.8 |
67.0 |
Monthly Payment |
$556 |
$534 |
$473 |
Amount Financed |
$32,625 |
$30,914 |
$28,022 |
APR |
5.84 |
5.75 |
4.09 |
Down Payment |
$4,032 |
$4,007 |
$3,280 |
Average Transaction Price |
$37,030 |
$35,565 |
$32,211 |
Used-Car Finance Data
|
July 2019 |
July 2018 |
July 2014 |
Term |
67.5 |
67.0 |
65.4 |
Monthly Payment |
$412 |
$398 |
$374 |
Amount Financed |
$22,256 |
$21,574 |
$20,369 |
APR |
8.6 |
8.3 |
7.5 |
Down Payment |
$2,603 |
$2,582 |
$2,219 |
Source: Edmunds