Stratospheric interest rates on new and used car loans are — predictably — putting a damper on auto sales, as consumers reevaluate their shopping habits before accepting a car loan.
According to new data from Edmunds, average transaction prices for new and used vehicles are still up over last year, but the curve is flattening. The average transaction price (ATP) for a new vehicle dipped slightly to $46,991 in October 2022 after peaking at $47,222 in June.
However, that still represents a 3.1% year-over-year increase compared to October 2021. The ATP for a used vehicle dipped to $30,045 in October 2022 compared to a peak of $31,095 in April 2022, but still represents a 4.7% year-over-year increase compared to October 2021.
Interest rates soar
It should come as no surprise that interest rates for new and used vehicles are skyrocketing as the Federal Reserve raises interest rates across the board in an attempt to quell inflationary pressures.
The average annual percentage rate (APR) for a financed new vehicle purchase climbed to 6.3% in October 2022 compared to 4.2% a year ago, according to Edmunds, representing the highest new vehicle APR since April 2019. The average APR for a used vehicle purchase climbed to 9.6% in October 2022 compared to 7.4% in October 2021, which is the highest since February 2010.
If anything, Edmunds may be optimistic. According to U.S. News & World Report’s financial reporting, the average November 2022 interest rate was 9.31% on a new car, and buyers with below-average credit would see 1970s-level interest rates. November’s average rate on a new car loan for borrowers with scores between 600 and 699 is 15.16%, and buyers with lower scores are facing even higher rates, U.S. News notes.
As a result of higher rates and commensurately higher payments, more car shoppers are opting into longer auto loan terms to make monthly payments more palatable. Edmunds data shows that 34% of financed new car purchases had an average loan term of 73+ months in October 2022, compared to 27% in October 2017.
“Car shoppers might be going into Black Friday weekend aware that elevated prices and limited inventory will make deals harder to come by, but they might not fully understand just how critical it is to prepare for their purchase, and how they will finance it, before going to the dealer,” said Jessica Caldwell, Edmunds’ executive director of insights.
“The last time interest rates were this high, consumers could at least rely on lower vehicle prices and a greater range of inventory to soften the blow. That simply isn’t the case in this market.”
Rising interest rates hit young buyers and those with less-than-stellar credit the hardest. One tactic for those buyers to achieve the best possible interest rate is to bring in a co-signer with a better credit rating. Used-car giant Carvana is pushing this idea to help match buyers with vehicles.
“Carvana’s co-signer option allows customers to apply for vehicle financing with another individual — like a parent, child, partner or family member — as an option to help unlock more attractive financing terms … Customers will see their financing terms — both with and without their co-signer — in a matter of seconds with no impact to either individual’s credit score,” the company stated in an October press release.
How to get the best possible deal
To help car shoppers ahead of the holidays, Edmunds put together a list of insider tips to help consumers avoid major pitfalls and maximize savings:
Get preapproved financing
With a preapproved loan in hand, you can quickly decide whether the finance rate the car dealership offers you is the better deal. Often, dealers have access to better rates from local credit unions. Having preapproved financing gives buyers options.
Search for promotional APR offers in your area
Automakers may subsidize loans with lower interest rates — however, most of these offers require that consumers agree to shorter 36- or 48-month loan terms. Use your preapproved offer to compare rates and determine what makes the most sense for you.
Pencil out the whole loan
Buyers tend to think of monthly payments, but if they can take advantage of promotional APR offers they may pay less for the vehicle over the life of a loan. Edmunds analysts calculated how much additional interest a consumer could expect to pay on a $40,000 car loan for 72 months at 6.9% APR versus 48 months at 1.9% APR.
They note that jumping from the longer, higher-rate loan to the shorter, lower-rate loan would push up the monthly payment from $680 to $866 but would save a consumer $7,392 in interest paid. Also, If a buyer has extra cash on hand, it might be worth putting more down to reduce the monthly payment.
Consider alternate vehicles
Depending on the promotional financing offered, it may be a better deal to get a more expensive vehicle.
“Financing a car purchase is tricky in today’s market, but if you play your cards right, financing $45,000 could cost you less over time than financing $40,000 over a longer period,” said Ivan Drury, Edmunds’ director of insights. “With many automakers offering highly targeted incentive programs, you might find that promotional offers will allow you to save so much in total interest paid that it might be worth switching brands or models.”