Will Interest Rate Rises Impact Car Buyers?

Car Loan

Rising interest rates have been impacting consumers all over the globe. An unfortunate side effect of combating inflation, interest rate hikes have resulted in the costs of groceries, fuel, and even consumer goods skyrocketing. This growing cost of living has naturally prompted families across the globe to tighten their belts.

But whilst many households can sidestep economic inflation by maintaining conscientious spending habits, it’s a bit more difficult for households that may be managing debts like home loans or car loans.  As the cost of borrowing money goes up, it’s safe to say that prospective car buyers who are looking to purchase with finance may find themselves reevaluating their borrowing power to reflect our current interest rates.

But will the interest rate rises impact other types of car shoppers and even car owners? That’s precisely what we’ll be exploring today.

Interest Rates Affect All Loans

You might be wondering if car loan rates will rise too or if it’s just home loan interest rates. Unfortunately, when a reserve bank raises interest rates, the banks that provide consumer credit will typically lift their variable and fixed interest rates for their loans to consumers. For instance, if the reserve rate rises by 0.50%, the banks will raise their interest rates by that much as well – although they usually set a few percentage points over the reserve. 

So, in this case, yes, interest rate rises will affect those shopping for car loans, as they will those looking for any other types of consumer or business loans. This also means that if you take out a car loan at a higher interest rate, you can expect your monthly loan repayments to be higher. You will also likely pay more interest over the lifespan of the loan when compared to a lower rate.

Higher Interest Rate Means Less Borrowing Power

When interest rates rise, and people’s home loans, personal loans, and other consumer debt repayments increase in turn, they usually have less discretionary or disposable income to play with. The downside of this is that stagnation in consumer spending may further exacerbate inflation, which can then prompt reserve banks across the globe to lift interest rates once again in order to avoid an economic recession.

It’s for this reason in particular that banks and lenders are eager to sign consumers up for loans. And whilst tackling rising interest rates may deter many of us from securing personal loans, there are also some undeniable benefits to buying during a time where nobody else wants to buy.

The lack of competition in the property and car markets may allow you to snag a better deal on a car than you would’ve been able to find prior to interest rate hikes. So whilst you may not have adequate discretionary funds to afford as large a car loan as you would’ve liked, the sale cost of your dream automobile may have decreased. And with fewer buyers on the market, you may be able to secure your next vehicle at a competitive rate.

That being said, it’s important to remember that even with a smaller car loan, car shoppers can still expect to spend more on loan repayments over the life of their loan. So the savings you experience now at the time of purchase may even out in what you pay in interest on your loan. So if you don’t want to buy just yet, you may instead decide to use this time to save. Just remember, however, that inflation will impact the value of the money you have sitting in your savings account as well. With that, it’s worth asking if you’d prefer to buy your next vehicle now by using your savings to grow your down payment, or save and make your move later once interest rates begin to lower and the market becomes more competitive once again.

What if You Have Pre Approval for a Car Loan?

If you’ve paid a deposit on a new vehicle and have finance pre-approval, then interest rate rises could affect your purchasing ability. When your new car arrives at the lot, and you want to proceed with the purchase on finance, your repayments will be recalculated with the higher interest rate factored in. From here, the lender will reassess your ability to pay off the loan based on the new rates, and your income and expenses. 

In addition, lenders will often add a few percentage points onto the loan to consider future interest rate rises and your ability to meet the higher repayments. In other words, lenders will assume the rate rises will continue and assess your earnings and expenses. This may mean for some people that their car loan is now unaffordable in the worst-case scenario.

It’s worth considering this possibility when shopping for a new car. In this case, you may want to adjust your expectations or go for a vehicle with lesser value that you can still comfortably afford even with additional rate rises.

What If I Use My Mortgage to Buy a Car?

If you have extra funds sitting in your home loan due to making repayments above your minimum required amounts, you can redraw these funds to buy a new car. However, you need to ensure you can still meet the minimum repayments on your home loan. And it’s important to keep in mind that redrawing will often result in a recalculation of your home loan repayments.

Home loans have a lower rate than car finance, but if you redraw or refinance to afford your new car, you are still adding debt that you need to service. And a higher rate on a larger principal amount can still result in your having to pay extra repayments in the long term due to your higher loan rate.

What if You Have an Existing Car Loan on a Variable Rate?

If you’ve currently got a vehicle on finance and can comfortably manage your monthly repayments on top of your mortgage and other living expenses, then a rate rise won’t mean the end of the world for you. You can absorb the extra repayments if your earnings remain the same or rise. 

However, if your earning drops due to a job loss or a reduction in hours, you may have to refinance your existing car loan. Consider discussing the possibility of shifting to a fixed rate loan with your loan provider. If this isn’t an option, then you may even consider selling the car and downsizing to a secondhand vehicle that you can buy outright. After all, it’s not only finance loans that are impacted by rising interest rates. 

Will Interest Rates Affect Gas Prices?

Finally, as we mentioned earlier, economic inflation impacts more than just our debt. It also increases the costs of our groceries, our utility bills, and other weekly expenses within our households. On that same note, it will (and already has) impacted what we can expect to spend on fuel every time we fill up our cars.

For this reason, it’s imperative that prospective car owners consider the fuel efficiency of a vehicle they’re looking to purchase prior to signing their sale contracts. Even if you can afford to take out a loan on a new car, the cost of filling up that car’s gas tank every week may eat into your discretionary funds even further and cripple your household budget in other ways.

On a similar note, car shoppers should also consider the availability of spare parts and other financial factors when looking to purchase a car today. Ongoing delays with international trade may result in difficulties securing spare parts or additional costs in mechanic fees.

By considering these other fiscal factors, car buyers can work to alleviate how inflation and rising interest rates affect their purchasing and borrowing power.

So will interest rate rises impact car buyers? In a nutshell, yes. Those looking to purchase new cars may find that their borrowing power with regards to car loans is impacted by rising interest rates. Similarly, the cost of new vehicles may also increase, as will the costs associated with servicing your vehicle and ensuring it always has a full tank of gas.

So long as car buyers consider these additional expenses and think critically about their own car finance decisions, they should be able to secure a vehicle that aligns not only with their budget but with their personal and household transportation needs.