The past two years have been brutal to the automotive industry, with issue after issue presenting itself to automakers and consumers alike. The number of borrowers with outstanding car payments has surpassed pre-pandemic levels, and the auto loan defaults have exceeded 2 percent.

This past summer, the Federal Reserve implemented interest rate hikes that we have not seen in over 20 years, and it’s no surprise that this has naturally affected the auto loan industry. We have seen a rise in wages over the past two years, but unfortunately, inflation has risen higher than wages, so consumers are still struggling the same.

Average Vehicle Cost

Along with these changes, the average cost of a vehicle has steadily increased, with the average price being $10,000 more than it was in 2018.

Another big factor that has affected the auto industry is the surge in interest rates. In 2021, auto loan rates were at an all-time low, and they have been steadily climbing ever since. Contributing factors include rising bond yields, economic uncertainty, concerns about declining collateral values, and elevated auto loan delinquency rates.

Factors at Play

So why exactly do we expect to see auto loan rates improve in 2023? Again, it is due to a variety of factors. First, demand has calmed down, and supply has improved. These are the basics of how an economy is run, and the math is moving in the right direction.

Since there are fewer people vying for new vehicles, buying factors like purchase price, interest rates, and other car-buying variables will improve for consumers. And though auto loan delinquencies have risen this year, they are not as bad as they have been in the past.

The hope is that wages will continue to grow, and as vehicle prices begin to stabilize, auto affordability will soon follow. As long as the UAW doesn’t have too bad of a lasting effect on the auto industry, we can expect to see auto loan rates continue to improve over the coming year.