More new-vehicle buyers finance at rates higher than 10%

About one of every seven new-vehicle buyers obtained financing last month with interest rates commonly associated with the used-vehicle market as automakers continued to scale back incentives, Edmunds said Tuesday.

Fourteen percent of borrowers who bought a new vehicle last month will pay interest rates higher than 10 percent, according to Edmunds, the highest levels 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," Jessica Caldwell, Edmunds' executive director of industry analysis, said in a statement.

The average interest rate on new-vehicle loans in March rose 70 basis points year over year to 6.36 percent, its highest level in a decade, Edmunds said. The average new-vehicle transaction price last month increased 5.5 percent, or $1,911, to $36,534.

Automaker incentives and rising interest rates have been causing sticker shock for car buyers.

On March 20, the Federal Reserve agreed to maintain its benchmark interest rate in a range of 2.25 to 2.5 percent and said it is unlikely to raise rates this year, a change from its forecast of two increases in 2019. The benchmark rate directly impacts auto finance interest rates.

The industry pullback in subvented finance deals also contributed to rising interest on new-vehicle loans. Zero percent financing accounted for about 4 percent of financed new-vehicle deals last month, down from 7.4 percent last year.

Fewer customers are receiving lower interest rates in general, according to Caldwell. With no-interest deals drying up, customers are also seeing fewer deals between 0.1 and 3.99 percent.

Almost half of all new-vehicle transactions last month had interest rates between 4 and 7.99 percent, compared with 38.9 percent of transactions in March 2018.

Though economic uncertainty usually spurs incentive activity, analytics company ALG expects automakers to continue decreasing incentives as the year progresses. ALG said in a statement last week that average incentive spending would reach an estimated $3,604 per vehicle, down 5 percent — or $191 — from a year ago.

Incentives have "gotten more expensive for automakers," Caldwell said. "They'd rather shift those dollars elsewhere."

Inventory levels at dealerships are also more disciplined than last year as more automakers pulled out of the sedan segment, Caldwell added. Inventory levels that more accurately reflect consumer demand are easing the pressure that usually drives incentive activity.

Still, Caldwell predicts a seasonal spike in incentive spending this summer.

Meanwhile, new-vehicle loan terms stayed relatively flat last month, and monthly payments dipped $9. Total amount financed for new vehicles rose 3 percent, or $942, on average, to $31,962, and down payments rose 6 percent to an average of $4,217.