Auto lenders lowered interest rates on new-vehicle loans last month in anticipation of a Federal Reserve rate cut, according to Edmunds. As a result, July marked the third straight month that the average rate fell for new-vehicle financing.
On July 31, the U.S. central bank cut borrowing costs a quarter percentage point, the first rate decline since the financial crisis. The average interest rate for new vehicles financed in July declined 16 basis points from the previous month to 5.84 percent, Edmunds said. That's nine basis points above last year's 5.75 percent.
Jeremy Acevedo, Edmunds' manager of industry analysis, said the industry responded to the Fed's decision before it happened in the belief that borrowing money would be cheaper in the coming months.
"The cat was out of the bag on the rate being cut, and the amount was well thought out ahead of the meeting," Acevedo told Automotive News.
The cut occurred at a good time for auto dealers, he said, as they needed a boost clearing out 2018 models this summer.
Edmunds estimates 3.3 percent of new vehicles sold in July were 2018 models, the highest level of previous model-year sales in any July that Edmunds has recorded. The shopping site began collecting the data in 2002.
"It's a bit of flexibility that they didn't have before. A lot of automakers — a lot of dealers — their hands were tied on how high interest rates were," Acevedo said.
Additionally, the rate cut will likely help mitigate dealership floorplanning expenses, which have risen dramatically since 2017.
Still, Acevedo said the revised rate, which now sits at a target range of 2 to 2.25 percent, is unlikely to impact what consumers will see in a dealership finance office.
Buying a new vehicle will remain expensive, Edmunds says, compared with when some vehicle shoppers were last in the market. Five years ago, 30 percent of customers obtained financing at interest rates under 2 percent, Edmunds said. In July, just 13 percent of consumers did so.
Edmunds believes the new-vehicle sales lift in July — the first year-over-year sales lift of the year — was a quirk. Despite rate declines, Edmunds still expects U.S. sales for the year to slip in the range of 2.5 percent industrywide. Automotive News estimated an overall industry sales increase of 1.2 percent in July, and a seasonally adjusted annual sales rate of 16.8 million.