With auto loan rates climbing, will customers buy now?

With the economy still in expansion mode, car loan interest rates are heating up, testing the financial wherewithal of creditworthy consumers interested in buying a new or used vehicle.

For the second month in a row, average car loan rates rose, this time to an annual percentage yield of 5.82 percent in June, according to the most recent statistics available from Edmunds. That's a near full percentage point higher than 12 month earlier, when the APY was 4.96, and up from 4.10 compared to five years ago.

Jeremy Acevedo, manager of industry analysis at Edmunds, noted the regularity with which interest levels have risen may lead to a softening of purchase activity for dealers.

"Auto loan interest rates have been steadily on the rise this year and we don't see them going down anytime soon, which could mean trouble for automaker sales through the end of the year," Acevedo explained.

Rates still competitive
Historically speaking, car loan interest levels are still in affordable territory, which may serve as a catalyst for on-the-fence buyers to enter the market right away should levels rise further. Similarly, asking values on all new and used automobiles are climbing. Indeed, in July, new-vehicle prices rose 2.9 percent on a year-over-year basis, according to vehicle valuation firm Kelley Blue Book. The typical selling value for new light cars now runs approximately $35,359, up around $985 from July 2017 but down slightly versus June.

Tim Fleming, analyst for the Irvine, California-based auto pricing company, indicated buyers appear to be gearing their attention toward alternative vehicle options.

"Average transaction prices rose 3 percent year-over-year, thanks to market demand quickly backing away from cars," Fleming said. "Cars are expected to make up only 31 percent of July sales, down from 36 percent just one year ago, which is pushing transaction prices up as consumers opt for pricier SUVs and trucks."

Average used vehicle selling for roughly $19,700
Used vehicle prices are also headed higher, considerably so from 2013. Through the first quarter of the year, the typical used or pre-owned automobile in the U.S. sold for $19,657, according to separate data published by Edmunds. That's a 2.2 percent increase from the corresponding three-month period in 2017 and up more than 17.5 percent tracing back five years earlier.

Acevedo surmised that with rates still pretty reasonable, the expectation that rates and car values will maintain their upward trend may spur consumers to buy sooner rather than later, but that's still yet to be determined. Just the opposite may be the case for borrowers with less than sterling credit.

"Shoppers with average or subprime credit may end up putting off purchases as financing vehicles gets increasingly more expensive," Acevedo added.

Although there were some exceptions, the lion's share of major automakers saw sales slip in July, down roughly 3.1 percent for Ford and 6 percent overall for Toyota, USA Today reported. General Motors, the nation's largest automaker, no longer releases monthly sales data. Subaru experienced its best July on record, with sales rising by almost 7 percent.

Buying a used or new vehicle is a big decision for consumers, and the same can be said for dealers who provide financing options to customers using alternative credit data in their analysis of borrowers' financial histories. From loan originations to background checks, Microbilt makes the decisioning process easy and comprehensive through a combination of public, private and proprietary financial particulars to help you make better credit decisions. Keep tabs on our events calendar for information on trade shows where we'll be demonstrating how our products work.