Will Debt Cap Fight Keep You from Buying a New Car?


Estimates of what will happen to consumer borrowing interest rates if the government defaults on August 2 are wildly divergent. But some expect that interests on loans could move at least .5% higher. That would certainly hurt the housing market, and could ding the new car market as well. Consumers already pressed by high gas prices and concerns about the economy may think twice about their next vehicle.

A long-term default on U.S. paper or a downgrade of America's debt will almost certainly add to all of the interest rates pegged to Treasuries. Industries that are already under sales pressure will face new struggles in the second half if that is so. June car numbers were disappointing in an industry which needs over 12 million new light vehicles sales a year for most of the manufacturers to be modestly profitable. The sales situation has not been helped by production that is off-line in Japan which has hampered the import of popular cars like the Toyota (TM) Prius.

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A consumer who walks in a showroom today will find financing deals which range from 0% to 5% depending on the desperation level of the car company and dealer. Cars and light trucks with bloated inventory carry low interest rates and often "cash back." Those offers are supposed to grow as 2011 models need to be cleared out ahead of the new model year. Very popular cars in short supply, like the Prius, are sometimes sold above their sticker prices. Interest rates on loans for cars like the BMW 5-series are high - dealers can barely keep the German model in stock.

A car buyer who wants to get a new vehicle as 2011s go on sale or attractive 2012 models come to dealers for the first time, could have to pay hundreds of dollars in total monthly payments over the course of a three year loan at 3%, compared with a 2.5% rate before the government debt fiasco. On 60-month loans, a .5% increase could push total repayment up by $1,000 or more.

Good luck to the showroom dealers - this will be one to watch.