How to mitigate rising interest rates for auto loans
The Federal Reserve issued its latest interest rate hike in early November. It marks the sixth increase this year and has pushed new auto loan finance rates to their highest since 2019. Rates for used cars have also hit their highest since 2010. This will affect car shoppers this holiday season and into 2023 as they must contend with fewer low annual percentage rate incentives and more expensive car loans overall.
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 84month loans result in a person paying roughly a 20% premium over MSRP over the life of the loan,” said Ivan Drury, director of insights for Edmunds. On a $40,000 vehicle, with the average APR of 6.3% and a 72-month term, this translates to $8,139 in finance charges, plus sales tax and title fees. Drury adds that this added cost will cancel any value you would get by trading in that vehicle in the near future to take advantage of elevated used car values.
Edmunds experts provide a few tips on how to best manage high-interest rates to help shoppers.
For those with good credit
Consider leasing: We’re not making the case here that leasing a new car is a better financial move than buying it. But with the average new car monthly loan payment around $700, and an increasing number of people with payments in excess of $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. Additionally, it is not uncommon to find vehicles with dealeradded accessories or added fees.
“In a scenario where all the lease terms are the same, the monthly payment for a vehicle with an MSRP of $40,000 and a $2,000 markup will be higher than leasing a $42,000 vehicle with no markup,” said Richard Arca, Edmunds’ director of vehicle valuations and analytics. There is no residual value on markups and the customer pays for all of it plus interest over the lease term.
● Find a vehicle with a low APR offer: While there are no longer 0% interest offers, it is still worth looking into promotional offers since they tend to be lower than the average rate. If you’re willing to keep an open mind about brands and models and are able to 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 been given a number of manufacturer-recommended inspections, thorough reconditioning and a factory-backed limited warranty. While certified pre-owned vehicles are typically more expensive than non-certified pre-owned cars, they tend to have promotional financing from the automaker’s finance arm. When you combine the lower cost to finance with the added peace of mind from the warranty, a certified pre-owned car starts to look more promising.
For those with lower credit scores
● Consider buying an older used car: The average used-car interest rate is higher than the new-car rate, but since a used car is generally less expensive than a new one, you’re more likely to be approved for financing and have a lower monthly payment than if you bought it new. Just be mindful of the length of the car loan, as the finance charges can quickly skyrocket with the higher rates.
● Get preapprovals from lenders: This applies to those with either a high or a low credit score. Take the time to get preapproved by other lenders before you head to the dealership. It will give you a better idea of what the total loan amount will be and give you a basis from which to compare the interest rates that the dealership’s lenders may offer.