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The pricing gains are good news for auto makers, but for many consumers it is leading to downsizing. Loan terms are getting longer and higher prices are putting younger, first-time buyers in jeopardy.
Redesigned pickups, such as Chevy Silverado, to further drive up average transaction prices.
Good Time to Buy
Analysts say it’s a favorable time to purchase large pickups with interest rates at record lows, making vehicles more affordable. Banks are cranking up lending activity after the recession to fuel an increase in industry sales.
Overall deliveries are up 7.1% to 6.39 million units so far this year, from 5.97 million in like-2012, according to WardsAuto data.
Industry expectations call for both short-term interest rates, near 0% since 2009, and long-term rates, equally as low, to begin rising starting in 2014. The monetary policy of the Federal Reserve meant to stimulate the economy is keeping the rates low, but banks can’t make money and that eventually could hinder the recovery by limiting lending.
The Federal Reserve has signaled intentions to curb its activity in the financial markets, too, which also portends a rise in rates. Higher interest rates will make vehicle loans more costly, pushing up the final purchase price for buyers as early as next year.
But’s Dixon insists the effect higher interest rates may have on affordability will be muted. He points to a 4.3% interest rate over 60 months on a $30,000 vehicle bought with no money down translating into a monthly payment of $557.
Move that interest rate to 6.0%, which the typical loan carried in 2005, and the monthly payment rises to $580 or $23 more a month and $1,400 over the loan term. “Rates are going to go up, but it’s not going to add a heck of a lot to the monthly payment,” he says. “And we won’t see 6.0% for some time.”
For now, more buyers are stretching their loans over longer periods.data shows 60% of all new-vehicle loans now extend beyond 60 months. Between fourth-quarter 2010 and fourth-quarter 2012, the average term lengthened from 63 months to 65.
The longer terms risk leaving owners upside down on their loans, in which they end up owing more on their vehicle than it’s worth and finding it more difficult to buy the next time around. “You start to become concerned about the equity position,” Dixon says. “It takes longer to build equity, and the risk is greater for negative equity.”
Expect leasing to become more popular as new-car prices rise. It already represents 24% of the market this year, from 18% in 2008, J.D. Power says. “That’s certainly one way” to improve affordability, says Chevrolet’s Perry. “You see lease penetration go up as the price of the car goes up.”
New fuel-efficiency and safety technologies are other factors that will continue to drive up the cost of new vehicles. The federal government estimates corporate average fuel economy rules peaking at 54.5 mpg (4.3 L/100 km) by 2025 will add about $3,200 to the price of a vehicle. NADA research puts the figure much higher, to about $5,000 per vehicle, warning the increases could price some buyers out of the market.
New safety regulations will come down the pipe, too. Technologies such as rear-vision cameras and safeguards against smartphone misuse will cost the industry billions of dollars to implement, with the upticks passed to consumers.
The pending rear-vision camera rule, which federal regulators tabled at the last minute, was expected to cost upwards of $2.7 billion to install on new vehicles.