Analyst Says: Car Loans Could Get More Expensive as Car Prices Fall

Owners are becoming more wary of lending money to cars.

Americans financed 64 percent of new car purchases in 2017, according to the Department of Commerce. That was the highest level in half a century, and the “federal response” to that rise is surely not going to be to allow lenders to take even more risks.

In fact, many experts think car finance could get even more expensive and, by extension, more difficult for consumers to get loans.

That’s precisely what one of the nation’s most prominent automotive analysts has forecast, as reported in the Wall Street Journal. Last week Douglas Anmuth, the Wells Fargo analyst, predicted that the decline in used-car prices could force lenders to raise the interest rate on new car loans.

Consumers could, therefore, face higher rates to purchase brand-new vehicles.

Anmuth’s prediction follows a steady and sizable decline in prices for used cars and trucks. Over the past six months the average used-car value has fallen by 9 percent from a peak of $21,800 in March 2018.

The price decline reflects a big drop in total demand and an increasing shift away from trade-ins toward leases.

Although the trend is expected to continue, it’s possible that the price declines could become less pronounced. In that case, one of the reasons that Anmuth raised his forecast is the possibility that prices could start rising again, as was also the case last year.

Now that Edmunds, the market-research firm, reports that used cars were more affordable in May than they’ve been in years, it’s worth taking a second look at the prospect of higher interest rates on new car loans.

The market may be in something of a bubble, but that doesn’t mean that a sustained price decline is imminent.

Last time we had a deep decline in used-car prices, there were some strong signs that it was coming.

More used cars were being put on rental fleets, as short-term rentals prefer to carry fewer vehicles than were available in the open market. That was a harbinger of greater supply, which pushed down prices.

Used-car supply has, in fact, been falling.

Another factor that could keep prices down is a broad change in consumer spending habits. People are increasingly likely to lease their vehicles rather than finance them with new car loans. Some of that change could be a continuation of the boom that followed the 2008 recession, but a lot of it could be a response to the changing cost of cars, and in particular the increased difficulty in acquiring one.

So, perhaps there isn’t any danger of a bottom falling out in used-car prices. As for potential trouble with new-car loans, we could still see a drop if consumers embrace what other economists have called the “cycle of one sale to another,” as they choose to trade in a more expensive car than they can afford, then buy a new one.

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