February 28, 2025
Interest rates are down, but affordability is still a challenge in the auto retail industry.
The average rate for a new car was 6.8 percent in the fourth quarter of 2024, down from 7.4 percent a year earlier, according to Edmunds. But new-car buyers in the fourth quarter were paying $754 a month on average, up from $739 a year earlier.
Affordability challenges have been growing in the auto retail market since before the COVID-19 pandemic, said Satyan Merchant, TransUnion senior vice president and auto business lead. Now inventory shortages and rate increases have eased, but prices are still high, Merchant said.
“People are still buying larger cars, vehicle prices are still higher than five years ago, and interest rates are a little higher than five years ago,” he said. “I think it might take some time to unfreeze that.”
The Federal Reserve cut its benchmark rate target 0.25 points on Dec. 18, and the federal funds rate target now sits at 4.25 to 4.5 percent. The Fed’s adjustments to the benchmark rate can have a ripple effect on the interest rates auto lenders charge consumers.
Potential tariffs on Canada and Mexico also could impact vehicle affordability, but how those policies will play out is still uncertain.
But there is pent-up demand for cars. Auto lender Santander surveyed roughly 2,200 Americans making between $50,000 and $148,000 a year in December for the lender’s quarterly Paths to Prosperity study.
Forty-five percent of those surveyed said they are considering buying a vehicle in 2025, while 52 percent said they delayed buying a car in 2024 because of the cost.
The impact of rates in dealerships
The recent rate cuts do not impact every dealership and lender the same.
“Even though the Fed dropped the rate, it hasn’t really dropped much in our neighborhood,” said Eric Lane, CEO of Gerry Lane Enterprises in Baton Rouge, La.
The Fed projected two more cuts of 0.25 percent each in 2025.
Many dealers and dealership executives who participated in Automotive News’ 2025 Dealer Outlook Survey still are concerned about the costs of buying a car.
Just more than half of survey respondents said vehicle affordability is one of the factors they are most worried about in 2025. Higher interest rates were a concern for 22 percent of respondents.
Average interest rates also can vary geographically, said Melinda Zabritski, Experian’s senior director of automotive financial solutions. The average risk profile of consumers differs by region, and the types of lenders in an area plays a part, Zabritski said.
For example, “areas with much stronger credit union market share are going to see different rates,” she added.
Affordability in the used-car market
Many car buyers are keeping their vehicles longer or turning to used vehicles in the face of affordability challenges.
The average age of cars on the road continues to increase. Vehicles 9 years or older are approaching 15 percent of all franchised used-vehicle sales, Zabritski said.
Experian has even seen more consumers with higher credit scores shift to the used market for lower monthly payments, she added.
“Everyone is looking for those older vehicles,” Zabritski said.
Used-car buyers in the fourth quarter paid $533 a month on average, down from $561 a year earlier, according to Edmunds. The average rate for a used car was 11 percent in the fourth quarter of 2024, down from 11.6 percent a year earlier, according to Edmunds.
But the used-vehicle market likely will see fewer late-model used vehicles enter the market this year because of the decline in leasing three years ago, Merchant added.
Only about 19 percent of new vehicles were leased in 2022, according to Experian, a far fall from 28 percent in 2020. The rate has been normalizing since the lows of 2022 and reached 25 percent in 2024.
Incentives, inflation affect vehicle affordability
Automakers started to spend more on incentives again last year, said Scott Gunnell, president of JM&A Group. Those incentives bring down some vehicle prices a bit, he said.
Economic headwinds, such as inflation, outside the auto retail market also can create affordability challenges, said Jason Meador, the head of direct markets at Zurich North America.
“If inflation were to come back for whatever reason, that is going to impact the consumer across the board,” Meador said. Inflation could “squeeze their budgets overall, which will then impact their ability to afford cars.”
Vehicle repair costs are a concern
The rising costs of repairing cars are straining customers’ pocketbooks as well.
The costs of car parts and repair labor grew last year, Gunnell said. Higher repair costs can drive up the price of finance and insurance protection products, he added.
But a fear of costly repairs also can increase consumer demand for those same protection products, said Jonathan Jordan, director of performance development services at JM&A Group.
“Consumers are looking to F&I protection products to really help them manage their budget and not have those unforeseen expenses associated with their car,” Jordan said.
Inflated repair costs can push some consumers into the new-car market, however, said Marie Knight, head of strategic services for direct markets at Zurich North America. Out-of-warranty vehicles can be really costly for car owners to repair today, Knight said.
“That drives a desire to purchase a new vehicle so they can mitigate their expense related to the cost of repairing and maintaining their vehicle,” she said.
Rising repair costs also can drive insurance companies to restrict their policies, said Christopher Pres, vice president of agency distribution operations at Polly, an insurance agency.
“Dealerships are having a harder time finding customers insurance in a lot of cases,” he added. “The insurance market for the past two years has been very challenging.”
Origianlly published on Automotive News.
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