Vehicle Interest Rates Rise; Zero-Percent Becomes Rare

As auto loan interest rates hit a 10-year high, the chances of finding zero-percent vehicle financing aren’t quite zero, but they’re getting slim, according to Edmunds, an online automotive marketplace.

Edmunds says the average interest rate on a new-vehicle loan last month hit its highest level in a decade. It is expected to end up at an average 6.36%, compared with 5.66% last year and 4.44% five years ago.

“Things just keep getting tougher for new-car shoppers,” says Jessica Caldwell, Edmunds’ executive director-industry analysis.

She adds: “Interest rates have crept up every month so far this year, and new-vehicle prices continue to hover near record highs. We’re on the cusp of what could be a pretty dramatic shift in the market, simply because a big chunk of buyers is getting priced out.”

Edmunds analysts say that although car buyers were able to find more zero-percent finance offers in March compared with the first two months of the year, these deals are much harder to come by than they have been historically.

About 4% of all financed deals in March were at zero percent, compared with 7.44% last year and 7.59% in 2014.

At one point, in the early 2000s, zero-percent financing was all the rage – at least for consumers with good credit – as automakers put the pedal to the metal in trying to move the metal.

Vehicle affordability is on the minds of today’s auto dealers who worry that rising MSRPs and higher interest rates may price many potential buyers out of the market. Affordability was a common theme at this year’s National Automobile Dealers Assn.’s annual convention.  

In this year’s first quarter, an increasing number of car buyers were pushed into higher financing brackets, Edmunds reports. Its data indicates shoppers with interest rates of 10% or higher made up 14.1% of the U.S. market in March. That’s the highest level seen since February 2008.

“It’s pretty alarming to see that a sizable segment of new-car shoppers are financing cars at rates that we’d normally associate with used-vehicle purchases,” Caldwell says.

There is some good news, though.

“The Fed has halted rate hikes for now and we’re edging closer to the summer selldown season, when the number of incentive offers starts heating up,” she says. “But without automakers stepping in to offer a reprieve, interest rates around 6% are likely the new normal.”

The average new-vehicle transaction last month reached $36,534 compared with $34,623 during the same month last year and $31,924 five years ago.

Last month, the average monthly car payment was $554 and the amount financed was $31,962, the company says.

Kelley Blue Book says the estimated average transaction price was $36,733 in March, up 2.3% year-over-year, led by the strength of full-size pickup truck pricing.

Kelley says that while a 2% increase doesn’t seem like much, factoring in higher interest rates this year and tighter incentives means average monthly payments are up about $30 from a year ago – an increase closer to 6%.

“This sharp increase is likely contributing to the slower sales pace in the first quarter,” Kelley says.