Are you in the market to buy a new vehicle this year? If so, you may want to consider pulling your purchase forward. Tune into the news these days and you’ll hear a lot of bugaboo about the Fed raising interest rates. There is now talk of possibly two more rate hikes later this year. If you are a car shopper looking to finance, that should matter to you.
Let’s start with the obvious. The cost of borrowing money is going up. This has already started and will continue to go up with the impending hikes. If you look around in the last month or so, low interest rate incentives are getting harder and harder to find. Still a lot of great incentives out there, but expect that low interest rate deals will likely get scarcer.
What does it all mean?
What does that mean to the end consumer in terms of dollars and cents and how long will it last? According to a recent forecast by Kiplinger, the bank prime rate that auto loans and home equity loans are based on will bump up from 4.75% to 5.25% by year end. Let’s assume you were financing $30,000 today on a 5 year loan. The difference for waiting could cost you another $400 plus over the life of the loan. Wait until next year and that will increase. Likely l the price of the vehicle you are purchasing will increase as well. With all of the expected rate hikes over the next couple of years, that $30,000 loan could end up costing you another $1000 or more.
If you are trading in your vehicle, you have another reason to worry. When the cost of borrowing money goes up, that usually cools consumer spending. Those on the fence about whether or not to buy may hold off. Even if you’re in the market to buy, there may be less demand in the market for used vehicles. As a result, you may end up getting less for your trade.
The big unknown
The big unknown here in the next several months will be whether or not automakers can continue to absorb the rising cost of incentives in order to move cars. If you are in the market and can find a good deal this upcoming Memorial Day, take it. Why take the chance to see how this will play out?
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