Interest rates and transaction prices on new vehicles have increased in June following a pullback from automakers on incentives.
The annual percentage rate (APR) on new cars averaged 4.2% in June, up from 4% in May, but down 10 basis points from April, according to data provider Edmunds. Interest rates remain historically low as the federal benchmark sits at a target range of 0% to 0.25%.
At the same time, the average transaction price in June is projected to increase by 3.2% from the prior year, according to a report from TrueCar. The average price of $36,332 is down 0.2% from last month, largely due to production facilities reopening after coronavirus closures.
“Average transactions prices continue to tick up year-over-year, but we are seeing signs of decline and expect a small dip in average transaction price month-over-month as automakers slowly pull back from zero percentage financing over 84 months that helped spur demand for higher price models and trim levels,” said Eric Lyman, chief industry analyst for ALG, a subsidiary of TrueCar.
As coronavirus cases rose across the world in mid-March, dealerships and production facilities closed through April, prompting automakers to promote incentives to boost car sales. When production resumed and showrooms began reopening in May, incentives were scaled back.
Zero percent finance offers made up 19.4% of all financed new car purchases in June, down from 24% in May, according to Edmunds.
“Although car shoppers still got to take advantage of favorable financing conditions in June, all signs point to automakers pulling back on the more generous incentives introduced at the outset of the pandemic,” said Jessica Caldwell, executive director of insights for Edmunds. “As states across the country have reopened, consumers have resumed more of their regular purchasing habits and, as inventory levels decline, automakers understandably are less prone to spend big to spur demand.”
The zero percent financing offers and long-term loan deals in April and May were meant to jump–start the auto industry amid sharp falls in vehicle registrations, but they also prompt concerns of growth in negative equity.
Loan terms for the first time since February averaged below 70 months, according to Edmunds. Long-term loans with 0% APR in April accounted for 25.8% of new vehicle purchases financed through dealerships, contributing to a record average negative equity of $5,571.
“At 0% financing, a six- or seven-year loan could make sense for a responsible buyer, but for many Americans, relying on longer loan terms to justify their bigger vehicle purchases could put them at greater risk for negative equity in the future,” Edmunds’ Caldwell said.
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