In recent years, car shoppers have been hit by what one industry analyst likened to a “one-two punch”: higher prices and interest rates.
“It really impacted affordability for consumers out there,” Kevin Roberts, director of industry insights and analytics at CarGurus, told Tech Brew. “Vehicle prices going up and higher interest rates really hit that monthly payment.”
At long last, some relief may be on the way, thanks to the Federal Reserve’s half percentage-point (or 50 basis-point) interest rate cut, bringing the central bank’s benchmark rate to between 4.75% and 5%. The move, which is expected to be followed by more rate cuts in the coming months, came after months of deliberations by central bankers over whether inflation had sufficiently cooled.
This reduction in borrowing costs is likely to trickle down to auto loans, albeit not overnight—and some experts say it might be good news for the EV market amid a challenging time in the auto industry’s electric transition.
“If you’ve got a higher price on an EV, higher interest rates just makes that monthly payment even more painful on that front,” Roberts said. “So, potential interest rate cuts would be welcome from that point.”
By the numbers: As of August, the average annual percentage rate (APR) for a vehicle loan was 7.1% for a new vehicle and 11.3% for a used vehicle, according to automotive marketplace and database Edmunds via PR rep Talia James-Armand. The average monthly payment for new and used cars stood at $737 and $548, respectively.
By comparison, the APR for new and used vehicles was 4.3% and 7.4%, respectively, in August 2021.
Edmunds’ consumer sentiment data indicated that some 62% of car shoppers were holding off on their next vehicle purchase because of high interest rates—and 64% reported that a Fed rate cut would influence the timing of their next vehicle purchase.
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This sentiment was even more common among shoppers who intend to buy an EV: 74% of those considering an EV for their next vehicle said a rate would affect the timing of their purchase, compared to 57% of non-EV shoppers.
“What we’re seeing now is that EV buyers are very deal-focused, just because the EV deals on both used and leasing and purchasing have been so good,” Jessica Caldwell, Edmunds’ head of insights, told us.
Affordability is among the factors holding back EV adoption. Battery-electric vehicles remain more expensive than hybrids or combustion engine vehicles, although that gap has been narrowing as automakers cut prices, introduce new models, and offer incentives to stoke demand.
In August, the average transaction price for an EV was $56,575, according to Cox Automotive, compared to $47,870 for vehicles overall.
Experts do expect lower rates to influence the EV market, but it’ll take time.
“Anytime you can reduce monthly payments,” Roberts said, “that’s always a positive for demand.”
Still, lower rates won’t solve affordability issues on their own, and Caldwell noted that how impactful the rate cut will be likely depends on the type of buyer. A low- or middle-income buyer in the used market with decent credit, for example, might see a noticeable difference in their monthly payment.
“Where it’s not going to make a difference as much is those people that probably need it the most, the deep subprime [borrowers], and they’re paying 25% interest,” she said.
Where it could start to make a real difference, she said, is if there are multiple rate cuts in a row. Stay tuned on that front—the next one could come as soon as November.