Vehicle loan rates will continue to rise this year as the Federal Reserve issues further bumps, so borrowers will pay more to finance cars, especially borrowers with bad credit, forecasts consumer financial services company Bankrate.
The interest rate effect won’t be entirely offset by increased vehicle inventories resulting from eased supply-chain scarcity and bottlenecks, a shift that has helped level high prices, Bankrate says.
Rates will be “tempered by competitive lenders,” but rate increases are expected to continue as the Fed works to quell inflation.
Still, most buyers should be spared from worst-case scenarios.
“For most car buyers – those with average or better credit – rates will remain below 7% on new car loans and below 8% on used car loans,” says Bankrate Chief Financial Analyst Greg McBride. “But consumers with weaker credit profiles will have a much different experience as credit tightens and rates reach well into double digits.”
Bankrate predicts that five-year new-car loans will reach 6.9% this year, four-year loans 7.75%.
The Fed increased the benchmark rate seven times in a row over the past year. Bankrate says 60-month financing for a new car averaged 3.86% last January and closed the year at more than 6%.
Meanwhile, wholesale vehicle prices fell by more than 15%.
The net effect on consumers is higher borrowing costs. Bankrate quotes a CoPilot study that found monthly car payments are up by more than 3%.