As Americans struggle to keep up with rising car prices and interest rates, more are falling behind on their car payments. According to Fitch Ratings, the percentage of subprime auto borrowers who were at least 60 days late on their bills climbed to 5.67% in December, marking the steepest rate since the 2008 financial crisis.
Rising car prices result from multiple factors. Increasing production costs due to inflation and higher raw material prices affect manufacturing. Tariffs on imported vehicles and components also drive up prices. Automakers also invest in new technology and features, causing prices to rise. Additionally, consumer demand for luxury and high-performance vehicles can drive prices up.
The root cause of this issue can be traced back to the semiconductor shortage and COVID-19-induced disruptions in the global supply chain, which caused prices for used and new vehicles to surge. Despite prices starting to subside towards the end of 2022, the average cost of a new car remains near $50,000.
Compounding the problem is the rapidly rising interest rates. J.P. Morgan Research did predict in November last year that new car prices would decline by 2.5% to 5% in 2023, used car prices by 10% to 20%. However, rising interest rates were still expected to offset impact of lower vehicle prices.
The average new auto loan rate jumped to 8.02% in December, up from 5.15% one year ago, according to Cox Automotive. This, combined with the steep stick prices, has pushed new-vehicle affordability to the lowest level of 2022.
For many Americans, rising interest rates and high car prices have pushed their monthly payments above $1,000. According to data from Edmunds.com, about 16% of consumers who financed a new car in the fourth quarter have payments that are that costly, up from 10.5% one year ago.
The auto industry may face trouble ahead if consumers default on their loans. This is a cause for concern not just for the industry but also for the economy as a whole. As consumers struggle to make car payments, it could lead to a domino effect on other areas of household budgets and potentially lead to a larger economic downturn.
And if you’re looking to buy a car in 2023, there are a few key months to keep in mind.
May is a great month to buy a car as it’s when new vehicles are coming to dealer showroom floors and dealers need to get rid of old inventory. Especially the end of May, as dealerships offer Memorial Day deals.
The end of the year, October through December, can also be a good time to buy a car. October is when new models head to showroom floors and dealers want to unload existing inventory. November sees Black Friday deals, including on cars. December is when salespeople are trying to meet year-end goals and may offer bargains to reach their targets.
It’s also worth noting that 2022 saw a huge increase in demand for used cars, with prices increasing 42.5% as of September, due to the sticker shock of new cars prices going up 6.3% in 2022.