How a recession can affect your car loan interest rate

Talks and rumors of a recession will always be unnerving. The mere mention of it will make most people think about the impact it will have on their jobs, loan repayments and other financing related matters.

One of the things affected by the recession is our vehicles, especially those that are still not on a payment plan. Without a doubt, a recession can be a double-edged sword for your car financing, from interest rates to refinancing.

But what exactly does this mean for your car?

What is a recession?

A recession occurs when the economy contracts and slows down for at least six months. There are several factors that can cause a recession, but one thing is certain: it can have a negative effect on a household.

Typically, this is caused by at least two fiscal quarters in a row, when the economy is hit by reduced gross domestic product (GDP). So what does it mean for the common people? This can lead to shorter working hours and even unemployment for some people.

Concerns about the economy will lead to households spending less and saving more, which will of course lead to lower incomes. This could reduce the profits of small and large businesses, leading to mass layoffs and unemployment.

It is a vicious circle that is difficult to break. Although recessions are a typical part of an economy’s natural growth and contraction, they can increase significantly financial stress of households when there is a lack of adequate planning. Job losses, lower incomes and rising costs during such periods often force families to cut back on spending, further slowing economic activity and deepening the recession. If a recession continues long enough without effective intervention, it can escalate into a depression.

Recession and depression

A recession differs from a depression in a number of ways. As mentioned, a recession is caused by two consecutive fiscal quarters of negative GDP growth, which means a temporary slowdown in economic activity. Depression, on the other hand, is much more severe and long-lasting. In simpler terms, a depression is a recession multiplied by ten or even more.

A full-blown depression means that there will be larger-scale mass layoffs in several sectors of the economy and unemployment will be high. Unlike a recession, which lasts less than a year, a depression can last years, putting people in dangerous financial situations.

Recession and interest rates

When we think about loans, including car loans, one of the first things that comes to mind is of course interest rates. When signs of a recession emerge, the government and central banks will take steps to resolve matters before they get out of hand. They could create and implement policies that promote economic growth, including changing interest rates to keep the economy afloat.

One thing to keep in mind is that interest rates usually increase right before a recession. These increases will help reduce inflation and reduce consumer spending. If market demand exceeds available goods and services, this will help balance consumer spending habits.

On the other hand, interest rates usually fall during a recession because the government wants more people to spend their money instead of saving, thus promoting economic growth.

What a recession does to your car financing

A recession can mean a number of things for your vehicle. If you plan to finance a car just before a recession, you will face expensive interest rates. For this reason, you need to budget and plan as it will be more difficult to get a loan during this period.

Something that also happens during a recession is repossessions. The auto repo rate tends to increase during a recession due to increased unemployment. Fortunately, many agencies offer services such as financial support for car confiscation if you are unlucky enough to have this happen to you.

Another way a recession will affect your car financing is by affecting its value. As households tighten their budgets, they will become more hesitant to buy expensive items, including cars. This means that if you plan to sell your car during a recession, it will be more challenging, and if you are desperate to sell it immediately, you may be forced to reduce its value.

And there’s one more thing you need to consider: car parts. A recession can significantly affect the production of goods, including the parts your car needs. This is due to the way materials and product movements often take place across multiple countries. This will significantly reduce the production and distribution of auto parts.

Last words

A recession is a scary topic for most people, and yes, that includes car owners. If you’re planning to finance a new car right before a recession, you’ll likely have a hard time thanks to the rise in interest rates. On the other hand, if you decide to sell your car during the recession, you may be forced to reduce the value of your car in order to sell it.

While the recession can be a major obstacle for you and your car, planning for it and dealing with it smartly can alleviate some of your worries about the recession.

Article written by Tiffany Wagner, tiffanywagtw@gmail.com