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Can you afford the car you bought?

Peep-peep, this is Street Drift. The daily newsletter gives you auto industry news more often than you floss. And you don’t have to lie to your dentist about us.

So, buckle up, and let’s hit the road together!

The Red Light: Fed Raising Rates affect

Deep Dive!

You thought the Fed raising the rates was a snooze-fest? Think again, my car-loving friend! Because what happens in the Fed boardroom doesn’t stay in the Fed boardroom – it affects the auto industry too.

See, when the Fed raises rates, it’s like a game of Jenga – everything gets a little shakier, a little riskier. And when things get riskier, lenders get nervous and start tightening their credit. It’s like trying to drift around a corner with bald tires – you’re asking for trouble.

And that trouble shows up in the auto market, where sales start to cool as people can’t afford those higher rates. It’s like trying to rev your engine without enough fuel – you’re not going anywhere fast.

Last year, declining vehicle sales were impacted by increasing auto loan rates, and guess what? Auto loan rates have continued to rise this year despite the Fed’s small increase in February. As of this week, the average new auto loan rate is estimated at 8.94%, up 92 BPs from December 2022. And the average used auto loan rate increased to 14.01%, up 164 BPs from December.

Interest rates on 60-month new car loans in the United States from February 2014 to February 2023

This ain’t good news for affordability, which was already the key reason for the decline in vehicle sales last year. With rates and prices rising, it’s gonna be tough to maintain demand momentum. And with the Fed raising rates again, lenders are likely to move rates higher still.

But don’t worry, all hope is not lost! As the Fed reaches its peak and demand cools a bit, those rates will stabilize and lenders will start to loosen up again. It’s like going through a tough patch in a relationship – things may be rocky now, but eventually, you’ll find your way back to smooth roads.

But don’t worry, revheads, it’s not all bad news. Credit is still flowing and lenders are being compensated for their risk. And once things stabilize, we’ll get back to those good ol’ days of affordable auto loans and growing demand. For now, keep your eyes peeled for the impact of the Fed’s move on the automotive industry – it’s gonna be interesting to see how it all plays out.

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