The Federal Reserve published its latest interest rate hike in early November. It marks the sixth increase this year and has pushed new auto loan financing rates to their highest level since 2019. Used car rates are also at their highest since 2010. This will affect buyers of ‘automobiles this holiday season and in 2023, as they will have to deal with less. low APR incentives and more expensive car loans in general.
According to Edmunds sales data in October, the average interest rate was about 6.3% for new cars and 9.6% for used vehicles.
“High APRs coupled with 72- or 84-month loans result in a person paying about a 20% premium over MSRP over the life of the loan,” said Ivan Drury, chief information officer at Edmunds. On a $40,000 vehicle, with a current average APR of 6.3% and a 72-month term, that translates to $8,139 in finance charges, plus sales tax and title fees. Drury adds that this added cost will effectively cancel out any value you’d get by trading in that vehicle in the near future to take advantage of high used car values.
Edmunds experts offer some tips on how to best manage high interest rates to help buyers needing a new or used vehicle in the coming months.
FOR THOSE WITH GOOD CREDIT
Consider Leasing: We’re not arguing here that leasing a new car is a better financial move than buying one. But with the average monthly new car loan payment currently around $700 and a growing number of people with payments over $1,000, a lease can be a more affordable method of getting into a new car. That said, restrictions on lease deals have tightened, and you’ll need to be comfortable with lower mileage limits than in the past. Also, it’s not uncommon to find vehicles with dealer-added accessories or additional fees called aftermarket adjustments.
“In a scenario where all lease terms are equal, the monthly payment for a vehicle with an MSRP of $40,000 and $2,000 margin will be greater than the lease for a $42,000 vehicle with no margin” , said Richard Arca, director of vehicles at Edmunds. ratings and analytics. There is no residual value in the margins and the customer pays everything plus interest during the term of the lease, adds Arca.
-Find a vehicle with a low APR offer: Although there are no longer 0% interest offers, it is worth looking at the current promotional offers, as they are usually lower than the average rate. If you’re willing to keep an open mind about makes and models and can handle a shorter loan term, you can still get a solid financing deal by today’s standards.
-Consider a Certified Pre-Owned Vehicle: A Certified Pre-Owned Vehicle is a lightly used car that has received several manufacturer-recommended inspections, a thorough reconditioning, and a limited factory warranty. Although certified pre-owned vehicles are usually more expensive than non-certified pre-owned cars, they usually have promotional financing from the automaker’s finance group. When you combine the lower cost of financing with the added peace of mind of the warranty, a certified pre-owned car starts to look more promising.
FOR THOSE WITH LOW CREDIT SCORES
-Consider buying an older used car: The average interest rate on a used car is higher than the rate on a new car, but because a used car is generally less expensive than a new one, you are more likely to get approved to finance and have a lower monthly payment than if you bought it new. Just be mindful of the length of your car loan, as finance charges can skyrocket quickly with the higher rates.
-Get pre-approved by other lenders: This tip applies to those with a high or low credit score. Take the time to get pre-approved by other lenders before going to the dealership. It will give you a better idea of what the total loan amount will be and give you a basis for comparing interest rates that dealership lenders may offer.
– Fix your car while you fix your credit: In some cases, the best thing to do is to keep your current vehicle while you work on your finances. If you can keep your vehicle running for an extra year or two, it will save you more for a bigger down payment, which will lower the amount you need to finance. You can also use the time to work on improving outstanding items on your credit.
EDMUNDS SAYS: Interest rates are expected to remain high through 2023. When rates improve, you can always refinance your loan to lower your payment and lower your total loan amount.
This story was provided to The Associated Press by the automotive website Edmunds.
Ronald Montoya is a senior editor for consumer advice at Edmunds.