With speculation growing that the Federal Reserve could raise interest rates—and, by extension, push financing rates higher—there’s a healthy debate as to whether such a move would stop consumers from buying a new or used vehicle.
According to one expert, that’s not likely.
“If you take just a quarter-point increase, the average loan payment would go up less than $3 per month,” said Jason Laky, senior vice president and auto business leader at TransUnion, which tracks the 72.4 million outstanding auto loans in the U.S. “I don’t think that cuts much into the consumer’s wallet.”
Through the second quarter of 2015, the most recent loan data according to TransUnion, the average monthly auto payment was $438.73. Laky estimates a quarter-point interest rate hike would ultimately increase payments by $2.52, to a new average monthly payment of $441.25.
“Think of it as being the same price as a grande coffee at Starbucks,” he said.
TransUnion reports the average interest rate for an auto loan is 7.44 percent.
Although some worry that headlines about higher borrowing costs could spook consumers, Laky and others in the auto industry have said the fundamentals supporting higher demand for new and used vehicles are unlikely to change after one or two quarter-point interest rate hikes by the Fed.
Relatively low unemployment and strong consumer confidence are two important factors driving millions of Americans to buy a new car or truck. So far this year, new vehicle sales are up 3.8 percent, according to the consulting firm Autodata.
At the current pace, automakers will sell more than 17.2 million vehicles in 2015, making it the second-best year ever for auto sales in the U.S.
Another factor that will limit the impact of a quarter- or half-point jump in interest rates is the fact car buyers are stretching out their loans to keep monthly payments as low as possible. In the second quarter of 2015, the average term for a new vehicle loan was five years and seven months, according to Experian Automotive.
So how much would the Fed have to raise interest rates before auto sales slow? Most have said there would have to be a series of rate hikes over a relatively short period of time.
“These smaller increases at a moderate pace, so long as it doesn’t cause a shock into the economy, certainly won’t slow down consumer demand for new cars and for auto financing to support it,” Laky said.