Discussions and rumors about a recession are always nerve-wracking. Just mention it and most people will start thinking about how it will affect their jobs, loan repayments and other financing-related things.
One of the things that has been affected by the recession is our vehicles, especially those that haven’t been out of payment plans yet. There’s no doubt that a recession can be a double-edged sword for your car financing, from rates to refinancing.
But how exactly will it affect your car?
What is a recession?
A recession occurs when the economy shrinks and slows down for at least half a year. A variety of factors can contribute to a recession, but one thing that is certain is that it can have a negative impact on families.
Typically, when an economy is hit by a decline in gross domestic product (GDP), it is triggered by at least two consecutive fiscal quarters. So, what does this mean for the average person? This could result in some people working fewer hours or even losing their jobs.
Concerns about the economy will cause households to spend less and save more, which of course will reduce income. This could reduce profits for both small businesses and large corporations, leading to mass layoffs and job losses.
This is a vicious cycle that is difficult to break. Recessions are a typical part of the natural expansion and contraction of economies, but without adequate planning can significantly increase household financial stress. During this period, job losses, lower incomes and rising costs often force households to cut back on spending, further slowing economic activity and deepening the recession. If a recession lasts long enough without effective intervention, it can escalate into a depression.
recessions and depressions
Recessions differ from depressions in several ways. As mentioned earlier, a recession is triggered by two consecutive fiscal quarters of negative GDP growth, representing a temporary slowdown in economic activity. Depression, on the other hand, is more severe and lasts longer. Simply put, a depression is a recession multiplied by ten or more.
A full-blown depression would mean broader mass layoffs and high unemployment across all sectors of the economy. Unlike recessions, which last less than a year, depression can last for years, leaving people in dangerous financial situations.
Recession and interest rates
Of course, when we think of loans, including car loans, the first thing that comes to mind is interest rates. When signs of recession emerge, governments and central banks will take steps to address the problem before the economy spirals out of control. They may formulate and implement policies to promote economic growth, including changing interest rates to keep the economy going.
One thing you should be aware of is that interest rates typically rise before a recession. These rate hikes help ease inflation and reduce consumer spending. This will help balance consumer spending habits if market demand exceeds available goods and services.
On the other hand, during a recession, interest rates typically fall because the government wants more people to spend money rather than save, thus boosting economic growth.
How the recession affects your car financing
A recession can mean a few things for your vehicle. If you plan to buy a car before a recession, you’ll face high interest rates. Therefore, you must budget and plan as it will be more difficult to get a loan during this time.
One thing that also happens during a recession is repossessions. During recessions, car repurchase rates tend to rise as unemployment rises. Fortunately, if you are unfortunate enough to find yourself in this situation, many agencies offer services like car repossession financial assistance.
Another way the recession affects car financing is by affecting its value. As households tighten their budgets, they will be 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 you may be forced to reduce its value if you are eager to sell it right away.
One more thing to consider: car parts. Recessions can severely impact the production of goods, including the parts you may need for your car. This is due to the fact that material and product movements often occur across multiple countries. As a result, the production and distribution of auto parts will be significantly reduced.
last words
The recession is a scary topic for most people, and yes, that includes car owners. If you were planning to finance a new car before the recession, you may have a hard time due to rising interest rates. On the other hand, if you decide to sell your car during a recession, you may be forced to reduce the value of the vehicle to sell it.
While a recession can be a huge obstacle for you and your car, planning and dealing with it wisely will eliminate some of your worries about one.
Article written by: Tiffany Wagner, tiffanywagtw@gmail.com
