Low interest rates have helped consumers buy larger models with more options, particularly in the case of new vehicles, said Jessica Caldwell, Edmunds executive director of insights. She said "until recently, interest rates have been a bit of a cushion" during a time of low inventory, and high demand and prices.
"As Fed rate hikes continue, automakers will find themselves in a bit of a difficult position because lower interest rates will be a costlier marketing incentive at a time when consumers will be more reliant on lower interest rates to combat higher prices," Caldwell said in a statement June 15. "Although the used market has been quicker to reflect these increases, the fact that the new market is now being squeezed with no clear end in sight to supply chain issues means that car shoppers are going to be facing an even more challenging market. Given that auto loan delinquency is expected to rise, now is more important than ever for car shoppers to understand the risks associated with financing more than what they can afford."
Caldwell felt the latest Fed increase would impact both the new and used markets.
"Used will see a more immediate impact as borrowing rates will go up, and although the effect will be less dramatic on new-car APRs due to automakers offering subsidized rates for new buyers, their programs will not be as generous as they once were," she wrote in an email to Automotive News.
But Smoke felt the Fed's action wouldn't cool demand — at least not yet.
"Despite higher rates, we are not seeing a buildup of new-vehicle supply," he wrote. "This may change when production improves substantially, but it has not happened yet and likely won't before next year. As a result, we continue to see new-vehicle price inflation, limited discounting and record-low incentives.
"The Fed's actions will not fix the supply problem, but when production does eventually start to improve, demand may not be able to keep up without a material change in incentives and pricing."
Smoke said 2022 had already seen manufacturers offering fewer special financing deals to consumers, attributing this to the tight supply.
A lack of new inventory would probably keep used-vehicle demand "relatively strong," Smoke said, though he noted that "retail and wholesale used supply have returned to normal, and as a result, used vehicles have returned to being depreciating assets."
The average credit score on new-vehicle loans and leases rose 2 points from a year earlier to 736 during the first quarter, according to Experian. The average used-vehicle credit score increased 6 points to 669.
Smoke said fewer subprime and deep-subprime consumers are buying vehicles, but it's more a function of the budgetary strain they feel from overall U.S. inflation rather than auto interest rates specifically.