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A growing proportion of car buyers are signing up for monthly loan payments of $1,000 or more amid rising interest rates and higher car prices, new research shows.
Overall, 14.3% of consumers who financed a new vehicle in the third quarter committed to payments at or above, up from 8.3% for the same period in 2021, according to Edmunds. For buyers of electric vehicles, the share is 26%; for hybrids 24%.
“High prices and rising interest rates are delivering a double whammy to consumers by taking monthly payments to a new level,” said Jessica Caldwell, Executive Director of Insights at Edmunds.
The interest rate on new auto loans has hit 5.7%, up from 4.3% a year ago, Edmunds data shows. And with the Federal Reserve expected to hike interest rates further to combat persistent inflation, auto loan rates could rise even further.
The average price for a new car is almost $46,000
According to an estimate by JD Power and LMC Automotive, the average price for a new car in the third quarter was $45,971. While there are signs the market is cooling off, this amount is 10.3% higher than the same period in 2021.
Manufacturers’ sales incentives also contribute to these higher prices. In September, the average rebate was about $936, down 47.8% year over year, according to the JD Power/LMC estimate.
“The lack of inventory coupled with strong demand continues to allow manufacturers to maintain low levels of rebates,” said Thomas King, president of data and analytics at JD Power.
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Continued shortages of inventory are also partly responsible for the increased prices, as have consumer preferences over the past decade.
“We’ve seen Americans adopt a bigger-is-better mindset by being attracted to larger vehicles,” Caldwell said, adding that those cars also come with more comfort and advanced technologies that cost more.
Trade-in values help keep loan amounts down
Use the trade-in value of your used car whenever possible.
The increase in monthly payments would be greater if not for the higher trade-in values for buyers’ used cars, King said. Average trade-in equity for September was an estimated $9,617, up 21.7% from a year ago.
As used car prices ease, they remain 33% — or $8,810 — higher than a typical depreciation over the past two years, according to CoPilot, a car-buying app.
While there may be less room for negotiation for buyers given ongoing inventory challenges, another way to keep your payment down is to get the best possible interest rate by having good credit.
While it’s hard to know what credit rating a lender is using — they have options — the general goal of avoiding dips in your credit report will help your score, regardless of the specific one used, experts say.
“Some of the easiest ways to improve your credit score are to double-check your credit reports for errors and keep your open accounts in good standing — the latter of which means paying all of your credit bills on time and in full every month,” said Jill Gonzalez, analyst and spokesperson for personal finance website WalletHub.
“You can also improve your score by keeping unused accounts open, as it helps build a long credit history, which is essential for good credit,” she said.
