Car Shopping During the Debt Downgrade and Market Turmoil


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    Wall Street Picture

    The downgrading of the U.S. credit rating and the gyrations in the stock market might have some consumers wondering whether car prices and car loans will be affected. The short answer is no. | August 08, 2011

The downgrading of U.S. credit rating and the gyrations that's caused in the stock market might have some consumers feeling nervous about the impact of those issues on their ability to buy a new car. Will interest rates be rising? Will car loans be available? Will the price of cars go up? These are the main questions that may be on the minds of consumers today.

Lacey Plache, Edmunds.com's chief economist, says the turmoil is unlikely to have an immediate negative effect on car buyers. She examined market conditions and answered these key questions facing them:

Can I still get a car loan?
Yes. When the recession began in 2008, lenders tightened credit and cut off loans to many Americans. Since then, lenders have cleared the bad debt off their books and maintained more stringent credit requirements. Plache predicts that car loans will continue to be available to credit-worthy buyers because lenders are not lending as broadly to the sub-prime portion of the market as they did prior to the recession, so they will not be facing as much risk by continuing their current lending practices. Plus, lenders are once again able to absorb risk due to their stronger positions despite the recent stock market declines. Furthermore, automakers have an interest in supporting the availability of credit because they know that readily available credit is essential to their ability to sell vehicles.

Will the interest rates on auto loans increase in the short term?
No. A rise in interest rates has been a common prediction following the downgrading of the U.S. credit rating on Aug 5. However, Plache does not see car loan interest rates rising anytime soon. This is because there is a "counterbalancing effect" that will come into play. "U.S. debt is the world's reserve collateral. More treasury bonds will now be required to secure loans, meaning that the demand for the bonds will increase. This, in turn, will create a seller's market that will keep pressure on U.S. debt interest rates not to rise," she says. This will keep auto-loan interest rates stable. Many low interest incentives are currently available, such as zero percent financing on vehicles from Ford, Chevrolet, Chrysler and Nissan.

Will the price of cars rise?
Not likely. Plache does not see car prices increasing during the upcoming fall shopping season as a consequence of the debt downgrade and market shakes. Manufacturers were hard hit by the earthquake in Japan and are just beginning to restock inventories on their car lots. For the rest of the summer, dealers will be trying to clear lots for the next year's cars, which typically begin arriving in September. Incentives and rebates, which were sparse during the summer, will probably increase for 2011 models. Furthermore, Toyota and Honda have increased their incentives to stay competitive and not lose any more market share. These factors will create a competitive market during the fall car shopping season, Plache concludes.

While the upheavals in the larger economy are not likely to change shopping conditions, there are always fluctuations in the market that car buyers should be aware of. Before heading to the car lot, it's important to check current incentives and rebates, arrange financing and check the True Market Value of both the car you want to buy and your trade-in. Using these car buying tools will keep you on course — whatever turns the economy takes.

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