As borrowers and lenders anticipate the Federal Reserve will shave another 50 basis points off short-term, benchmark interest rates this year, including a quarter-point cut on Wednesday, auto experts say car shoppers won't see an appreciable difference in the rates they secure to borrow for a new crossover or pickup.
Interest rate cuts will help some but not all U.S. vehicle shoppers this year, says Jonathon Smoke, Cox Automotive's chief economist. Cox says interest rates on auto loans won't budge for consumers with lower credit scores, regardless of moves by the nation's central bank.
Smoke said the bond market, the key barometer of how the housing and auto markets respond to interest rate changes, has fallen 150 basis points since last October, but "only a handful of basis points have moved in auto rates."
"What we think is behind that is the credit tightening," Smoke said. "Subprime is growing, and being at a 10-year high, lenders [are] demanding a higher premium to cover their risk."
Shopping site Edmunds, which tracks monthly auto finance trends, noted that interest rates dipped during the summer sales season, though they remained higher year over year. The Fed lowered interest rates in July for the first time since the Great Recession.
"We saw the stars align a bit this year for car shoppers because after months of tighter financial conditions, the Fed rate cut coincided with a model-year sell-down where automakers and dealers were grappling with way too much inventory. Lower interest rates never hurt sales, and this rate cut certainly made it easier for automakers to be more flexible with the money they were willing to lend to car shoppers on top of their motivation to clear out their lots," said Jeremy Acevedo, Edmunds' industry analyst. "While consumers got to take advantage of some great promotional interest rates during the summer sales events, this isn't a sign of a major turnaround. As inventory becomes more aligned with the cooling market, we can expect to see a pullback on these promotional offers as well."
Customers aren't being charged more for auto loans, Smoke noted — they just aren't getting any benefits from lower interest rates.
However, consumers with the highest credit scores are seeing better rates, according to Cox, but even their rates haven't improved over last year.
Dealers, however, are less concerned when it comes to interest rates. Concern over consumer access to credit dipped in Cox's latest quarterly dealer survey, as did concerns over interest rates.
Twenty-one percent of franchised dealers who responded cited credit availability for consumers as a factor holding business back, down from 23 percent last quarter and last year. Just 17 percent of dealers cited interest rate concerns, down from 26 percent last quarter and 22 percent last year.
Few dealers cited interest rate concerns in their direct responses. They instead blamed economic instability and seasonal factors for a slowdown in sales, Cox said.