Buying an automobile has gotten more expensive, especially if consumers wish to finance the purchase in today’s economic landscape of rising rates, which has pumped the brakes on car makers offering no-interest auto loans.
No-interest loans have been vital to the car-buying space, offering consumers who meet the necessary credit requirements a chance to own the car of their dreams while foregoing the cost to borrow money. Per a report from ABC News, analysts at the car valuation site Edmunds cited that 14.6% of car deals featured no-interest auto loans in August 2017, but that number has slid to 7.4% this year.
Related: Ray Dalio: ‘Two Years Left’ in Current Market Cycle
Auto manufacturers like Toyota and Nissan are paring down their no-interest loan offerings–for example, Toyota financed 4.6% of their vehicles last August compared to 21% a year ago. For Nissan, that number has dropped by 8% compared to 2017.
In addition to cashback incentives, carmakers are on the hook for the tab to recoup the costs of money lost on no-interest loans. With less financing options available, this has also decelerated no-interest auto loan offerings due to a lack of supply, giving auto dealers less incentive to offer these zero percent loans.
The correlation between rising rates and no-interest loans doesn’t bode well for car manufacturers as more rate hikes are expected through the rest of 2018. Amid a backdrop of a GDP that increased by 4.2% in the last quarter and an extended bull run in the stock market, the Federal Reserve is expected to produce two more rate hikes in the federal funds rate by the end of 2018.
Steady diet of rising rates is in order
The economy being full steam ahead has seen the major indexes like the S&P 500 reach record levels. With no signs of slowing, it appears that a steady diet of rising rates is in order, according to Boston Federal Reserve President Eric Rosengren.
“Gradually increasing over the course of this next year makes sense,” Rosengren told CNBC in an interview. “If things work out well for the economy, and that’s what I expect and hope, then we’ll be in a situation where we need to have somewhat restrictive policy over time.”
With a monetary policy meeting slated for later this month, Rosengren also forecasts that the current federal funds rate will float between a range of 2.5% to 3%. After the two previous rate hikes earlier this year, the current federal funds rate stands at 2, which could affect auto loan offerings sensitive to these short-term interest rate moves.
In addition to the strong stock market and GDP, the latest employment data reveals a robust job market despite private payrolls missing its expectations. Companies added 163,000 jobs in August, which represents a tangible slowdown versus the 217,000 added in the previous month and below the average of 206,000 a month.
Additionally, the month of August revealed a steep decline in hiring by small businesses, but in spite of this, the labor market continues to thrive. Furthermore, this sentiment is paired with an unemployment rate that continues to be at historically low levels.
While no-interest auto loans are declining, Edmunds says that getting a good deal on a vehicle purchase can still be had, but consumers must “be more creative, combining a competitive interest rate with an incentive that the carmaker is offering. If you also can find a vehicle that has a deep discount from the dealership, the lack of zero percent financing becomes a nonissue.”
For more trends in fixed income, visit the Rising Rates Channel.