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Higher Rates Signal Mix of Good News, Bad News

Higher Rates Signal Mix of Good News, Bad News Featured

The recent rate hike by the Federal Reserve will impact the used-car market, but when that impact comes and how strong it is remain to be seen. The Fed raised its funds rate to 1.5 percent from 1.25 percent. Many auto creditors immediately announced a change in their prime rates. For example, Huntington Bancshares Inc. announced that its prime rate is increasing to 4.5 percent from 4.25 percent, effective Dec. 14. Most car shoppers pay a higher rate than that.  The average financing interest rate in the third quarter was 5.1 percent for new vehicles and 8.7 percent for used vehicles, according to Experian. Cox Automotive senior economist Charlie Chesbrough said the rate increase will not derail the car market from its strong pace. But Chesbrough said higher rates will have a negative effect on sales in the long run. \\\\\\\\\\\\\\\"Consumers could face slightly higher costs for all their borrowing – credit card balances, student loans, financing a house or a car,\\\\\\\\\\\\\\\" he said. \\\\\\\\\\\\\\\"At the same time, higher rates drive up the cost to provide low-rate financing, which eats into profit margins and hurts the car makers as well.\\\\\\\\\\\\\\\" Cox Automotive chief economist Jonathan Smoke said the market is already seeing the impact of higher rates and tighter credit. Lease payments are higher year-over-year and there are fewer new leases. Higher average interest rate on new vehicle loans has only added $12 to the average monthly payment but the increase has been far more substantial for lower credit borrowers. \\\\\\\\\\\\\\\"The monthly payment matters,\\\\\\\\\\\\\\\" Smoke said. \\\\\\\\\\\\\\\"When rates rise, many consumers do not have an option to pay more.\\\\\\\\\\\\\\\" That might be good news for the used car market, he said, as more consumers opt for used to meet their monthly budget. In the end, the biggest factor for the market might be the reason the Fed raised rates George Hoffer, an economist at the University of Richmond, said the rate increase was a bullish call. "This is evidence that the economy is really strengthening" Hoffer said.