High interest rates and rising new car prices may drive consumers to search for more affordable options like used or new economy vehicles, according to an Edmunds report.
Over the last decade, the shift to higher-end luxury vehicles, driven by a low interest rate environment and extended financing loan terms, has meant that economy cars are not as readily available, Edmunds reported.
Edmunds transaction data showed that 17% of new vehicles sold in March were under $30,000 compared to 44% five years ago. Meanwhile, consumer demand for larger vehicles with more features and technology drove sales higher for cars that cost upward of $60,000. The sale of these cars rose to 17% in March compared to 6% five years ago.
New car prices skyrocketed by 33% over the last five years and the average transaction price rose to $47,713 in March, according to Edmunds. At the same time, consumers have also been dealing with more expensive financing terms. This combination of factors could grow the demand for more affordable vehicles, Edmunds reported.
“Over the last decade, low interest rates combined with longer loan terms allowed Americans to embrace the ‘bigger is better’ mentality and buy larger, more richly equipped trucks and SUVs that dominate the roads and driveways across the country today as small vehicles are going extinct,” Jessica Caldwell, executive director of Insights at Edmunds, said in a statement. “But now that interest rates have shot up, and without many new vehicle options left on the lower end of the price spectrum, buying a new vehicle will likely be out of reach for many consumers.”
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Car manufacturers are likely to respond to consumer demand for more affordable vehicles because they have done so in the past, Caldwell said. In 2008, for example, Detroit automakers responded to a spike in gas prices by manufacturing smaller, more fuel-efficient vehicles.
For consumers unwilling to shift their demand for size, the used car market could offer a more affordable solution.
“American car shoppers may not have the same enthusiasm for them as much as their bigger, flashier counterparts — but they will find that these options are what’s actually financially feasible in today’s credit environment,” Caldwell said. “Shoppers who refuse to compromise on size and price — which will likely be many consumers — will need to pivot to used options for their next vehicle, therefore keeping demand high in the secondhand market.”
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The average annual percentage rate (APR) on new vehicles financed in the first quarter of 2023 climbed to 7%, compared to 4.4% in the first quarter of 2022, according to a separate Edmunds report. That’s the highest level since the first quarter of 2008, Edmunds reported. For used cars, the average APR increased to 11.1% from 7.8% a year ago.
Consumers paid an average monthly payment of $730 for new vehicles in the first quarter of 2023, compared to $656 a year ago, according to Edmunds. For used cars, consumers paid an average monthly payment of $551, a slight increase from the $542 they paid last year.
“Consumers jumping into the secondhand market for the first time need to keep in mind that interest rates for used vehicles are typically higher than their new counterparts — and it’s critical to think beyond the monthly payment and take total costs into consideration over the life of the auto loan,” Caldwell said.
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