When Diego Zapata (49) decided to buy his 2022 Nissan Sentra, he didn’t expect it to be a bumpy ride. He was working 60 hours a week as a porter at a grocery store for most of last year, including the winter season, and thought buying a vehicle was not only going to shorten his commute time to work, but it was also within his budget.
But then his hours were slashed by a third when the store located in the eastern part of Long Island, started filling all of its available positions, just like most employers around the country did.
“I could afford the first payments,” Zapata said. “[But] I felt the blow when the overtime was over.”
As the country experiences the effects of rapid inflation, and the increase of interest rates for borrowing costs to counter it, low-income individuals are finding it extremely hard if not impossible to buy cars. For those who can afford it, it often means cutting spending on everyday necessities that are already affected by inflation. And for those who can’t, it could mean missing out on a better job or cheaper grocery stores that require a car to get to.
“There’s consistent evidence that inflation hurts these people the hardest,” Sara Kimberlin, Senior Policy Analyst at Stanford Center on Poverty & Inequality, said. “If you have a higher income, you have a cushion. You can replace high brands with lower brands [or] postpone a vacation. Low-income people are already doing that.”
The car market was hit the hardest by supply chain disruptions caused by the COVID-19 pandemic and the microchip shortages. Both haven’t recovered to pre-pandemic levels. As a result, the price for new cars increased by 21 percent and used cars increased by 33 percent since Jan. 2020. Before that prices have remained relatively the same for almost 25 years. .
Meanwhile, rising interest rates have also made it more expensive to finance a vehicle. The latest State of the Automotive Finance Market report by Experian.com shows that the average amount for car loans grew to $27,768, an increase of $8,152 for the past three years. The interest rates seem to be turning consumers from banks to Credit Unions for loans because they offer a lower rate. By the end of 2022, credit unions took the lead from banks in the auto finance market with almost 30 percent of it.
“We've seen more auto loans here, and it could be because our rates tend to be lower,” Chris Murrey, vice president of marketing at Island Federal Credit Union, said.
The combination of high inflation and rising interest rates is causing more people to default on their payments. The number of 60-day delinquencies on auto loans have surpassed pre-pandemic numbers.
Mr. Zapata bought his car in April of last year when prices were high. The loss of hours has made him find ways to cut expenses on food like eggs, meat, and coffee by searching for the best deals at multiple stores. He also stopped visiting Manhattan to see the skyscrapers, something he’d do almost once a month.
“You [eventually] learn where certain products are cheaper,” Zapata said.
Adding to Mr. Zapata’s challenges, an unusually high interest rate of 19 percent, which he had to agree to because he'd been living in the U.S. for less than eight months when he signed. Higher interest rates are common for low-income buyers, especially immigrants like Mr. Zapata, who was born and raised in Colombia.
“Imagine [you’re a] person with no credit or brand new to credit. No one knows you and you ask someone for $1,000,” Ornella McFarlane, sales representative at AutoNation Toyota in Georgia, said as she explained why banks will charge more in borrowing costs. Lending institutions rate people on the likelihood that they can afford to pay back loans. Those least likely to do so are seen as high risk.
This is one reason why 18-year-old Jaliek Fulford, will not even consider a car dealer. He graduated from high school at the age of 16 and immediately went to college to pursue a degree in Mass Communications in Mississippi. Then, he decided to pause his career, go back to NY and work, but not having a car has limited his job search.
“It's hard to find a decent car,” Fulford (18), said. Instead, he will try to buy one directly from the owner.
“I’ve looked into craigslist [and] Facebook marketplace,” he said. In the meantime, Fulford will remain working part time at his mother’s nonprofit organization for children.
Buying a car could get even harder if the U.S. economy enters a recession this year and companies begin laying off workers, as many forecasters now expect. The recent bank failures, which include Silicon Valley Bank and Signature Bank, only added more fuel to that fire. Even if the economy avoids a recession, the bank turmoil could reduce the credit that’s available including the one directed to car loans. People like Zapata will be the most affected.
“Banks will become more cautious on lending particularly [to] low-income groups because they are [considered] high risk groups,” John Rizzo, economist and professor at Stony Brook University said.
Despite the uncertain outlook for the economy, Zapata doesn’t regret his purchase nor paying almost $1,000 a month for his car. He believes the benefits outweigh the negatives.
“Buying it even when I’m paying more, has been a solution to transportation and has made my life easier [because] the transportation here is not efficient,” Zapata said. “I used to take the bus to work in the morning and then hoped someone would give me a ride on the way back.”