The cost of owning a car continues to rise

WASHINGTON — A growing cascade of financial pressures around car ownership is weighing on already strained consumers, including lenders who have borrowers’ limited ability to finance a car, rising insurance rates and car prices that remain well above pre-pandemic levels.

Following the recent turmoil in the banking sector, lenders have become increasingly cautious about who they will lend money to, with the auto loan rejection rate hitting 9.1% in February, the highest since 2017, according at the Federal Reserve Bank of New York. For those who can get a loan, the average interest rate on a new car has risen about 3 points over the past year to almost 9%, according to data compiled by Cox Automotive watch.

The rising cost of owning a car is leading to growing number people falling behind on car payments, and charities helping people trying to buy a car say they are struggling more than ever to keep up with the growing demand as they do face their own cost pressures. Given the critical importance of a car to finding and keeping a job in much of the country, the dynamics of the auto market could have even bigger implications for the economy.

“Because of the current job market, a lot of people can get a job, but the main thing holding them back is having reliable transportation and a car to get to and from work,” said John Van Alst, director of the National Consumer Law Center’s Working Cars for Working Families project. “So it’s really frustrating when we’re at a point where there are good job opportunities.”

Iyona Anderson, a single mother from Maryland who works as a pharmacy technician, is one of those car buyers who struggle to get a vehicle. While Anderson, 27, has enough money to make monthly loan payments of $12,000, she was unable to find a reliable car in this price range and was turned down. several times for a loan because of the damage she caused to her credit when she was younger.

“As a youngster trying to buy a car, if you don’t have the credit knowledge, it’s going to be very difficult, it’s going to be very difficult, especially these days,” Anderson said. “Also, you walk into the dealership and interest rates skyrocket or your monthly payments are sky high and even with a decent job, that’s not enough to cover car expenses as well as insurance.”

This left Anderson spending $300 a week on Ubers and Lyfts to get to and from work while working the night shift at CVS and other necessary trips, like to the grocery store. She says she has to walk her 5-year-old son to school every morning, even on cold and rainy days.

Anderson recently received a subsidized car through the nonprofit Vehicles for Change program, which repairs donated vehicles for use by families who need them to get to work. With the time and money she expects to save by owning a car, she hopes to start saving for a house and plans to look for a better paying job.

But the difficult dynamics of the auto market have also spilled over to nonprofits trying to provide cars to people like Anderson. Martin Schwartz, president of Vehicles for Change, said his group was getting an influx of calls from people struggling to afford a car as donations dwindled.

“There is a lot more demand for our cars. That person who could have afforded their own $3,000 or $4,000 car three years ago, now that same car is over $5,000, if you can find it. It’s way outside their ballpark,” Schwartz said. “And with the credit crunch, even if they could have afforded it, it’s about getting a loan.”

With people able to raise more money selling their old cars, the number of vehicle donations to her organization has plummeted and the vehicles she receives are in worse condition, Schwartz said. As a result, the non-profit organization has gone from delivering 400 cars a year to families to about 110 last year.

Used car prices had fallen slightly in recent months, but jumped up more than 4% in February, the biggest increase since 2009, with the average used vehicle selling for around $26,000.

As auto production began to return to normal for many automakers, new prices showed little sign of returning to pre-pandemic levels with the average monthly payment on a new car at $784 – up 29% compared to before the pandemic.

For those who can afford to buy a car and get a loan, there is also the rising cost of insurance. Auto insurance costs are up 14% in 2022, with the average car owner paying around $2,000 a year for full coverage if they have a clean driving record, according at Insurers say they have had to raise rates due to rising repair bills due to parts and labor shortages and the increased cost of replacing vehicles given the surge in used car prices over the past two years.

Low-income households have been disproportionately affected by these higher insurance costs, as rates are often higher for homeowners in urban areas and those with lower credit scores, less education or who are not married, Van Alst said. Drivers with excellent credit scores pay about half the price of drivers with bad credit, and in Wisconsin, for example, drivers can see their premiums increase by more than $4,000 a year when their credit goes from good to bad, according to Bankrate. data.

Rising interest rates also have a disproportionate effect on those who have the most financial difficulties. For used-car buyers with subprime scores, the average interest rate is 17%, up about 4 points from a year ago, and those with credit below subprime must pay an average rate of 22%, according to data from Dealertrack.

“You may not be able to borrow as much and what you borrow will be at a higher rate than it would have been a few years ago,” said Greg McBride, chief financial analyst at Bankrate. “That’s the case for everyone, but it particularly impacts subprime borrowers.”

All of these cost increases could ultimately lead to good news for car buyers, as they are expected to pressure automakers to lower prices to offset rising interest rates, easing values trading and the credit crunch, said Colin Langan, a senior automotive analyst at Wells Fargo.

Used prices have fallen from their peak and there are signs automakers are increasing the incentives they are offering as their inventory levels return to normal, Langan said. It could be a few years before prices return to pre-pandemic levels.

“I think we’re going to see price easing soon,” Langan said. “All the signs are there that it should pick up with interest rates rising, payments have increased a lot. That alone should put pressure on it.

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