Rising Interest Rates are Exacerbating the Vehicle Affordability Problem Despite Lenders Concessions

Rising interest rates are exacerbating the vehicle affordability problem despite lenders concessions. Vehicle prices increased significantly in 2020 and 2021, driven by new vehicle shortages during the pandemic.  While used vehicle prices have begun to normalize, they remain 55% higher than December 2019 levels. The increase in used vehicle prices and rising interest rates caused many borrowers to be priced out of the market.  Lenders have responded by increasing average loan terms and decreased interest spreads.  Average loan term increased from 65.7 months in Q4 2020 to 68.0 months in Q4 2022.  Interest spreads decreased across the credit spectrum, with subprime having the largest decline falling from 15.9% in Q4 2021 to 13.4% in Q4 2022.  Despite these changes the average monthly payment on a used vehicle loan increased from $417 in Q4 2020 to $526 in Q4 2022.

Sources:

Experian, Federal Reserve Bank of St. Louis, Manheim