High interest rates could disrupt the new car market, automakers warn

Porsche posted strong third-quarter earnings last week, but the sports car maker warned that inflation and high interest rates could slow future sales.

The European automaker says that higher borrowing costs could scare off customers. In a phone call with reporters, Porsche chief financial officer Lutz Meshke said: "Governments increased interest rates heavily […] that creates a situation where customers are quite reluctant [to buy] a new product."

Despite strong sales and big profits in 2023, Porsche is also worried that high interest rates extending into 2024 will raise operating costs and take a bite out of its bottom line.

According to Meshke, other challenges for automakers include China's slowing economy and "the geopolitical situation," most likely a reference to wars in Ukraine and Israel.

But Porsche isn’t the only auto company facing the strain of keeping business rolling against a backdrop of high interest rates.

Porsche echoes Tesla’s Elon Musk on interest rates

In contrast to Porsche, Tesla's profits sank to $1.9 billion in the third quarter from $3.3 billion during the same period last year. Elon Musk blames the flagging electric vehicle demand on high interest rates.

“I just can't emphasize enough that the vast majority of people buying a car is about the monthly payment,” he said. "If interest rates remain high or if they go even higher, it's that much harder for people to buy the car.”

Porsche’s outlook backs up Musk’s view: Tesla profits fell this year because of higher interest rates for borrowers, not diminishing public enthusiasm for EVs.

Porsche and Tesla could not be more different in the car market, but the current financial environment is having a similar effect on both companies.

In August, Tesla financing rates for new vehicle loans climbed to 6.09% for up to 72 months and 6.84% for 84 months on all models. Tesla rates further rose to 6.34%-7.32% by October.

That's on top of soaring car prices.

According to NPR, consumers are paying on average 30% more for new vehicles compared to pre-pandemic levels.

ECB, Fed rates to stay high for the foreseeable future

Interest rates have risen as central banks work to control inflation, which has increased costs across the new vehicle supply chain and made cars unaffordable for many.

And while higher rates are already putting a heavy strain on all borrowers—not just ones with auto loans—there’s still no clear end in sight.

Referring to the European Central Bank’s fight to tame Eurozone inflation, ECB president Christine Lagarde recently said, "We're not done yet.”

After ten back-to-back hikes, the ECB kept rates steady at its last policy meeting, but Europe's central bank was not shy to push back against any talk of rate cuts.

Across the pond in the U.S., the Fed is also poised to hold rates steadily higher, perhaps well into next year.