Buying a new car may cost you more.
Unexpectedly high jobs numbers in September have increased the chances of the Federal Reserve hiking interest rates at least once more this year. The central bank has been raising interest rates since March of 2022 to the current range of 5.25 to 5.5 percent—a two-decade high—which has pushed up borrowing costs of everything from homes to automobiles.
Auto-loans borrowing costs jumped to 7.5 percent last month for five-year car loans, according to data firm Statista, from its low of nearly 3.9 percent in December 2021.
Some Fed policymakers have acknowledged that with the U.S. economy still showing strength—as the job numbers showed—its fight to bring inflation down to the 2 percent target will need interest rates to stay higher for longer.
“Inflation remains too high, the labor market is still very strong, and output, spending and job growth are beating expectations,” Dallas Fed President Lorie Logan said Monday. “I anticipate that we will need continued restrictive financial conditions to return inflation to 2 percent in a timely way and sustainably achieve our goals of maximum employment and price stability.”
What does this mean for car buyers?
If interest rates stay high for an extended period over the next few years, it means that purchasing a car will cost consumers more than in the recent past.
While prices have shown signs of softening lately, in July the average price for a new car was up nearly 34 percent from five years ago, according to data from the online car platform Edmunds. A used car was close to 46 percent more expensive in the same time period.
The car industry is still struggling to recover from the COVID-induced supply chain crisis that slowed manufacturing and lowered the availability of new vehicles for sale leading to a spike in prices. With interest rates also elevated at historic levels, loans to acquire vehicles also saw an increase.
Edmunds analysts suggest consumers may have to be patient.
“Anyone waiting for a sudden reduction in dealer asking prices or a major uptick with incentives offers had better hold tight until next year,” Ivan Drury, Edmunds director of insights, wrote.
Complicating matters could be the ongoing autoworkers strike involving Ford, General Motors and Stellantis. A protracted stalemate could reduce supply and lead to a jump in car prices, analysts say.
But it’s not all bad news for car buyers, Edmunds said. Dealerships are offering more incentives to buyers to encourage more sales, despite the tough environment for shoppers.
“Pay attention to which brands are offering greater discounts and if you’re willing to give them a chance, it could save you some money,” Ronald Montoya of Edmunds pointed out.