Auto Loan Rates at Five Year High

News Analysis by Tim Holland

The Federal Reserve released its Consumer Credit statistical report for the month of January 2009 late Friday and some of the numbers seemed to jump off the page. Of particular note was the trend in “new car Loans at auto finance companies,” which proved to be a prime example of the tight consumer credit markets.

In 2004 average auto interest rates were reported to be at 4.92% with the average maturity being 60.7 months – just over five years.

For 2007 the average interest rate actually dropped slightly to 4.87% with the average maturity expanding to 62 months.

The average for 2008 reflected an increase to 5.52% and an average maturity of 63 4 months. However, the fourth quarter of 2008 saw the rate jump to 7.09%.

January of 2009 reports an interest rate increase to 8.23% and the loan maturity average dropping below five years.

If one were to be looking for red flags that were missed, the data for the second quarter of 2008 (ending June 30) would be a good reference point. The April to June period reflects a jump in interest rates to 5.28% and a corresponding drop in the amount being financed from $29,512 at the end of 2007 to $25,493 by the end of June 2008.

The auto industry attempted to influence the market with special financing deals which dropped the average rate in the third quarter to 4.87% resulting in the amount being financed moving up to $26,643 but it was too late. The banking crisis hit full force in October 2008 and corresponding new car interest rates jumped to 7.09% and the dollar amount being financed dropped to $24,400. The race to the bottom was on.

What also seems to be abundantly clear from the statistical analysis is that the future of the U S auto industry is inevitably tied to the banking crisis and that no amount of money injected into the auto industry (regardless of whether it is deserved or not) will turn the industry around or save it. It would appear that the auto industry will right itself only once the banking system is put on a clear track to complete solvency.