You might be familiar with this headline: Federal Reserve Raises Interest Rates. The one sentence not only impacts buying a home, however, it can also impact buying a car. You may be wondering is it a big deal interest rates keep rising? And more importantly, how will rising rates impact you purchasing a car or home?
1. The Impact Of Rate Hikes
When inflation increases, economic growth begins to slow. Prices of goods increases, and because of higher prices the demand for goods shifts downward. No demand can lead to less production causing unemployment to ensue. However, to combat this the Federal Reserve must raise interest rates.
An interest rate hike in the housing market means the amount of home you can afford goes down. For every 1% increase in interest rates, your buying power decreases about 10%. This will higher the annual percentage rate (APR), and limit your options on what you can afford. Hence, correlating with you having to spend way more on interest over the life of the loan. Because of less money going towards principal and more going towards interest, you will experience obtaining equity in your home to be very challenging. A majority of your monthly payment will go solely towards interest.
This similar process occurs when purchasing a vehicle. Rising interest rates ultimately increases the amount you will pay for a car. Hypothetically, let’s say APR on a vehicle goes from 5% to 5.8%. A $35,000 vehicle purchased at an APR of 5% would cost $4,629.59. When purchased with the APR of 5.8% the grand total balloons to $5,403.88. In a simple explanation financing a new car is going to get drastically more expensive.
2. Less Demand
The mortgage industry is currently in a massive downturn due to less demand. The industry is shrinking from a $4 trillion market to currently having an evaluation of a $1 trillion market. With interest rates as low as 2% during the pandemic, they are currently hovering 7%. This has caused a massive decrease in the refinance/ purchase market. In fact, Redfin Demand index- a measure of request for home tours and other home-buying services from Redfin agents- decreased 16%.
The automotive industry is currently in a downwards trend as well. According to an NBC news article, the impact of rising interest rates could lose the automotive industry $22 billion in sales. This would cause consumers to purchase 150,000 fewer new vehicles and 500,000 fewer used ones. If you get into the micro details, experts are saying the interest rates spikes will lead to a $15 billion loss in used vehicle sales and another $7 billion in losses on new vehicles. With vehicle prices now at all time records it is causing demand to form a downturn trend in the automotive industry.
Hopefully this list gave you some insight into how rising interest rates can impact you. If you need to transport your vehicle to a specific destination, a vehicle transport company can help. Make sure your vehicle is in good hands by selecting a reputable and experienced company.
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