New-vehicle interest rates reach 10-year high

The shortage of low or no interest rate deals in the new-vehicle market drove the average loan interest to a 10-year high last month, according to Edmunds.

And as many car buyers cope with sticker shock, Edmunds also found that most customers weren't willing to buy a new compact or midsize vehicle, rather than a truck or SUV, to lower their payments. A lease is often considered a tool to lower new-vehicle payments, but even payments on the most commonly leased vehicles have surged since 2016, the last time customers with 2019 lease returns were likely in the market.

The average interest rate on new-vehicle financing reached 6.3 percent in February, the highest since February 2009 and an increase of more than 1 percentage point from a year earlier. Of all financed deals, only 3.2 percent had no interest, compared with 8.3 percent in February 2018. And only 18 percent of shoppers received a rate below 3 percent in February, compared with more than a quarter of customers last year, Edmunds said in a statement Friday.

As vehicle costs and interest rates continue to rise, more shoppers have been priced out of the new-vehicle market, but most are committed to the style of vehicle they initially wanted, said Jeremy Acevedo, Edmunds' manager of industry analysis.

"We really haven't seen people make too many concessions in the style of vehicle they're looking for. While there's alternatives out there that are more affordable, it doesn't look like that's where shoppers are flocking," Acevedo told Automotive News.

Shoppers are putting more down to mitigate the costs of the vehicles they aren't willing to compromise on, according to Edmunds. The average down payment increased 6.6 percent to $4,187.

The average amount financed in February reached $32,071, up 2.4 percent from last year, consistent with consumer preference for trucks and SUVs, Edmunds said. The average transaction price of a new vehicle was $36,331, an increase of 4 percent or $1,438, Edmunds said.

Because of the competitive nature of the truck and SUV segments, automakers are concentrating incentives on that end of the market and all but ignoring compact and midsize vehicles, Acevedo said.

According to data from Motor Intelligence, incentive spending on average for light trucks declined slightly, dipping 1.4 percent, or $52, in February. Incentive spending on passenger cars on average dropped more significantly, falling 8.2 percent, or $292.

Meanwhile, there is less financial flexibility for lenders to lower payments, such as stretching out loan terms.

"In the past, finance arms have been able to maneuver and manipulate to make these vehicles affordable. Those options are running out," Acevedo said.

Monthly payments inched up 5.5 percent, or $29, to $556 on average, as the average loan term stayed flat at 69 months.

Separately, Edmunds said Wednesday that lease payments, depending on the model, have surged as much as 26 percent since 2016 and more than $1,600 over the life of the lease. The increases, driven largely by climbing vehicle prices, weakening residual values and rising interest rates, could price many car buyers out of the new-vehicle market.

"Three years ago, leasing was an affordable option for almost anyone considering a new vehicle, but the market has made a pretty dramatic shift since then," Jessica Caldwell, executive director of industry analysis for Edmunds, said in a statement. "Demand for sedans has fallen off so sharply that they don't hold their residual value like they used to, making lease payments much more expensive. Couple that with the record-high vehicle prices and soaring interest rates, and car shoppers who may have only ever leased are now going to be facing some tough decisions."

According to Experian, 28.3 percent of new vehicles were leased in the fourth quarter, compared with 28.8 percent the year earlier.

Edmunds' analysis included the most commonly leased vehicles to show which had the most drastic payment increases compared with 2016. Edmunds compared identical model and trim levels.

The Toyota Camry SE's leasing cost rose the most, jumping $2,834 — or 26 percent — on average over a 36-month lease term.

The price hikes could be "another nail in the coffin of the sedan market," Edmunds analysts said, as the gap between lease payments for utilities and sedans narrows. For example, in 2016, customers paid on average $1,746 more to lease a Honda CR-V LX with all-wheel drive than a Honda Accord LX. Today, the CR-V is only $37 more over a 36-month lease term.