People buying brand new cars Stright from the dealership lot by means of finance, are the cause of an alarming trend. On average Australians are taking longer, more expensive, loan terms to try and cope with historically high interest rates when purchasing a new car.
The interest rates discussion usually only involves house prices and share prices but many consumers are either un aware or choose to ignore the fact that the RBA interest rates has a direct effect on finance options for motor vehicle loans.
Cars, both new and second hand have gotten expensive since the start of the pandemic — really expensive. The market saw a favourable drop in used car prices for older vehicles at the start of the pandemic closely followed by supply chain shortages and a surge in prices across the market. In some cases second hand vehicles were selling for more than the original retail prices.
In 2024 The average transaction price for a new vehicle was $61949, that’s a nearly 30% jump compared to just five years earlier, according finder.com.au. And inflated list prices aren’t the only factor squeezing buyers. Interest rates on auto loans are also sticking around multi-year highs, with economists warning that it could take months for those rates to start coming down.
Right now is not an ideal time to be purchasing a new car, but some consumers simply can’t wait. As a result, more buyers are taking on lengthy car loans to get themselves into a new set of wheels.
The share of consumers taking out lengthy 84-month vehicle loans (seven years) has risen significantly since the start of the year. The trend towards longer loan terms suggests that buyers are trying to obtain lower monthly payments on car loans they ultimately can’t afford.
Consumers are not factoring into he equation the rate of vehicle depreciation or the total paid at the completion of the loan. An increase of two social issues has led to this behaviour. The rise of “keeping up with the Joneses” with social media playing a huge role in this. Secondly and more concerning is the rise of Australian house holds living week to week and only do the equations based on what they can afford on any given week and look taking the whole picture into account.
These longer loans risk putting more drivers into what experts call “underwater” loans or “negative equity,” This is when the market value of the car is lower than the remaining balance of the loan. This situation is more likely to happen with longer loan terms, where the car has more time to depreciate and the consumer is paying off the loan balance slower.
This “underwater” or as the Americans call it “upside down” is often not an issue until either an accident of sorts writes the vehicle off and the insurance covers market value of the vehicle leaving the owner with a payout lower than what’s owed on the vehicle or a trade it occurs where the consumer is entering a secondary contract with negative equity which can very get consumers into financial trouble with loans they are incapable of servicing. .
Waiting for a rate change
For many prospective car buyers, the best way to navigate the current car market is to simply wait. Of consumers who said they planned on buying a new car in the next 12 months, a majority of them said that they held off on buying a new vehicle because of high interest rates.
Forecast interest rate drops in the back end of 2024 didn’t ease much prssure in the vehicle loan space. Car shoppers found little relief from the elevated interest rates and high prices, which in turn hindered new-vehicle sales growth. Needless to say it seems the changes in RBA interest rates take longer to trickle through to the motor vehicle finance sector.
Our advise:
Granted this is a motor mechanics perspective, we are not finical advisors or economists.
Ideally if you can, Wait. 2025 may see interest rates drop but you need to be mindful that a change in rates today can take monhts to trickle down to the car yards.
If you must buy a new car now, try and buy the vehicle outright. alternatively look for demonstrator models or low milage vehicles that have already taken the bulk of the depreciation.
Finally, a serious conversation with yourself is probably in order. Do you really need a Range rover or a BMW when a Mazda at half the price will suffice.
