How Will Higher Interest Rates Affect Car Buyers and Owners?
Last month saw the 14th consecutive rise in interest rates, as the Bank of England continued efforts to combat inflation. With base rates now standing at 5.25%, headlines and heartstrings are straining at the knock-on effect on the cost of borrowing.
Given most cars are purchased on finance, there’s unsurprisingly a groundswell of concern amongst car owners, as they readjust monthly budgets to cover their outgoings.
So, what are the factors at play and how might they affect you as a car owner or potential buyer?
Key drivers for car owners
Economics rarely moves in one simple direction, a fact of life that is no more evident than in the car-buying market…
As the base rate climbs, the interest charges that banks and car finance companies put on top of their loans, ramp up in tandem.
Fortunately, as most cars are sold on finance agreements with a fixed interest rate or APR (annual percentage rate) for the life of the contract, most car owners will see their monthly payments remain unchanged.
However, if you purchased a car on a variable interest loan, or you need to refinance your vehicle, you could be at the mercy of the lenders, and will likely see your monthly payments increase with each consecutive rate rise.
Choices for car buyers
If you’re in the market to buy a car, you’re likely to find it more expensive to borrow money, especially if they have a bad credit rating. Put simply, there will be less pound in your pocket, with cars less affordable and choices reduced.
With decreased affordability, the demand for new cars is likely to decline and cluster around more economic models. While some retailers might be forced to lower prices to accommodate cash-strapped buyers, certain cars and deals might be harder to find.
Car buyers who “take flight” from the more costly new car market, will find a used car market riven by localised price increases.
As prices flux to accommodate shifting supply and demand, buyers should be aware that any quotes from dealers or finance companies will likely have a short shelf life. So, check to see that the deal still stands if you’re revisiting an offer, while at the same time being wary of a pushy salesperson looking to strongarm a quick decision.
The long term outlook
While there are recent signs that inflation is dampening, the markets are still pricing-in further interest hikes into 2023, with the base rate predicted to hit 5.8% by March 2024.
There is a silver lining though - until recently, rates were expected to hit 6%, before gradually falling to 3.6% over the next five years.
The less good news is that any short-term fall in demand for new cars will inevitably feed through to the supply of vehicles entering the used car market further downstream. The upshot: car prices will continue to rise, while car finance companies will likely price-in a further base-rate rise, through to the spring.
Our top tips
Against the uncertain outlook for car prices and finance agreements, here are our tips to get the best deal:
Shop around for the best interest rate: There are many different car finance companies out there, so it is important to shop around and compare interest rates. You may be able to find a better deal by comparing multiple lenders.
Consider a shorter loan term: If you can afford it, consider taking out a shorter loan term. This will mean that you will have to pay more each month, but you will also pay less interest overall.
Make a larger down payment: Making a larger down payment will reduce the amount of money that you need to borrow, which will also lower your monthly payments.
Get pre-approved for a loan: Getting pre-approved for a loan will give you an idea of how much you can afford to borrow and what your monthly payments will be. This will help you make an informed decision when buying a car.
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