Car buyers face a stubborn problem that Fed interest-rate cuts can't solve: record-high prices

By Venessa Wong

If interest rates declined by 1 percentage point, the average buyer would save $20 on their monthly payment

The Federal Reserve cut its benchmark interest rate by 50 basis points on Wednesday, but prospective car buyers hoping that will bring down the cost of loans shouldn't hold their breath, experts say.

With the average new-car payment at $737 per month and the average interest rate for a new-car loan at 9.5%, according to Cox Automotive, many people have been waiting on the sidelines for the Fed to make a move that will improve affordability. The average age of cars in the U.S. hit a record 12.6 years in 2024, and a car was the most common purchase people surveyed by NerdWallet (NRDS) this past spring planned to make when interest rates go down.

But while interest rates falling from current highs will eventually give consumers a boost - reducing interest payments on debt and helping the most financially stressed people stay out of delinquency - car-industry experts say lower rates will not have a significant impact on overall affordability. That's especially true for consumers with low credit scores, who will still pay high rates. A series of Fed rate cuts between now and spring 2025 would probably only translate to a decline of 1 percentage point in car-loan rates, they say, which would amount to about $20 off that average monthly payment of $737.

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That's not nothing, but the average payment is up nearly 28% compared with four years ago, and the other costs of owning a car - such as insurance and repairs - have also increased significantly over the last few years.

The bottom line, according to experts: Americans need to buy less expensive cars if they want to see a meaningful reduction in monthly costs.

"In most cases, interest rates aren't going to come down fast enough [or] soon enough ... to make a meaningful difference on those purchases," Greg McBride, chief financial analyst at Bankrate, told MarketWatch. Personal circumstances - for instance, a broken-down car or a new baby - are more likely than interest rates to dictate the timing of a vehicle purchase. In other words, people who need a new vehicle right away may not be able to wait on the Fed for relief.

The average new car now costs $47,870, yet about 34% of survey respondents told Edmunds in August they want one that costs $30,000 or less, a price range that includes only 18% of new cars sold. About 14% of respondents said they'd like to spend $20,000 or less on their next vehicle - yet there were almost no new-vehicle transactions under the $20,000 mark.

"I've been looking but refuse to pay the prices out there, add in insurance costs," one person wrote on X in response to a post on the social-media site about the Edmunds report. "I just keep my current vehicle running."

"It appears that the manufactures [sic] don't get it and don't care too. The gap between the haves and the have nots has never been wider or more stark, in my opinion," another commenter wrote.

"Having 6-7 year loan terms and 5% interest rates are not the answer," another user said.

The problem is that there is a smaller pool of less expensive cars than there was in the past, Edmunds's head of insights, Jessica Caldwell, told MarketWatch. "There was such a push, for so long, of Americans wanting bigger cars, more features, technology, creature comforts - all those things that the automakers made because it also helped their margins," she said.

Cheaper options may be limited, but even so, almost half of car buyers are buying vehicles that cost less than the average price, Cox executive analyst Erin Keating told MarketWatch, while full-size SUVs and pickup trucks are pulling up the average price. According to Cox data, there are 58 vehicle models priced under $35,000, with the Chevy Trax, which starts at $20,400, the best-selling car in that price range.

"There are plenty of options on the ground for consumers right now," Keating said, adding that "more people are buying subcompact and compact vehicles, especially SUVs."

In Consumer Reports' picks for the top vehicles for under $30,000, the Toyota Prius, which starts at $28,000, was named the best small car; the Subaru Legacy, starting at $25,000, was the best midsize car; and the Subaru Crosstrek, starting at $25,000, was the best small SUV.

The Prius was also named the top car overall in Edmunds's 2024 ratings; the Kia Sportage Hybrid, which starts at about $29,000, was named the top SUV; and the Chevy Colorado, starting at $30,000, was the best midsize pickup truck. In a separate ranking of sedans, the Nissan Versa, which starts at $17,000, was the best extra-small sedan, although it will be discontinued after 2025.

When the Ford Maverick launched in 2022 as a compact truck with a starting price of $20,000, "they couldn't build them fast enough," Karl Brauer, executive analyst at the car-buying site iSeeCars, told MarketWatch. "That was a good example where, you give people a solid value in the new-car market, and you'll sell every one you can make."

The median number of weeks of income needed to purchase the average new vehicle was 36.1 weeks in August, according to Cox. It was closer to 32 weeks in 2019. At this rate, "nobody's going to upgrade from the compact to the SUV based on a couple of rate cuts," said Bankrate's McBride. "Even when the Fed is done cutting rates, rates are likely to settle out at a level that's still higher than anything we had seen in the preceding 15 years or so."

As a result, the pressure to make cars more affordable has fallen on dealers, Keating said in a recent statement. As car costs hit a record high, dealer incentives in August averaged 7.2% of transaction price, up 49% year over year and the highest level since May 2021.

Falling rates on car loans may, however, be an opportunity for some car owners to refinance, depending on whether their credit score has changed, whether they owe more on the loan than their car is worth, and how long ago they bought the vehicle, according to LendingTree.

-Venessa Wong

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09-20-24 1445ET

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