The Federal Reserve released its last rate hike in early November. It’s the fourth hike this year and has pushed financing rates on new auto loans to their highest levels since 2019. Interest rates for used cars have also reached their highest level since 2010. This will affect car buyers this holiday season and into 2023 as they have to contend with less low APR incentives and more expensive car loans overall.
According to Edmunds October sales data, the average interest rate was about 6.3% for new cars and 9.6% for used cars.
“High APRs combined with 72- or 84-month loans result in a person paying a premium of about 20% over the MSRP over the life of the loan,” said Ivan Drury, director of insights at Edmunds. For a $40,000 vehicle with a current APR of 6.3% and a term of 72 months, that translates to $8,139 in financing costs plus sales tax and title fees. Drury adds that this additional cost will effectively offset any value you would gain from trading this vehicle in the near future to capitalize on increased used car values.
Edmunds experts share some tips on how best to deal with high interest rates to help buyers who need 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 financially better than buying it. But with the average monthly loan payment for new cars currently around $700 and a growing number of people making payments in excess of $1,000, leasing can be a cheaper way to get into a new car. However, leasing restrictions have tightened and you have to settle for lower mileage limits than in the past. Additionally, it’s not uncommon to find vehicles with dealer-added accessories or additional fees, known as market adjustments.
“In a scenario where all lease terms are equal, the monthly payment for a vehicle with an MSRP of $40,000 and a $2,000 premium is more than leasing a $42,000 vehicle with no premium,” said Richard Arca, Director of Vehicle at Edmunds reviews and analysis. Surcharges have no residual value, and the customer pays everything plus interest over the life of the lease, Arca adds.
– Find a vehicle with a low APR: While there are no longer 0% interest offers, it’s still worth checking out the current promotional offers as they tend to be below the average interest rate. By today’s standards, if you’re willing to be open-minded about makes and models and can handle a shorter loan term, you can still get solid financing.
– Consider a Certified Used Vehicle: A Certified Used Vehicle is a lightly used car that has received a series of manufacturer recommended inspections, a thorough overhaul and a factory backed limited warranty. While certified used cars tend to be more expensive than non-certified used cars, they are usually encouraged by the automaker’s financing department. When you combine the lower cost of financing with the added security of the warranty, a certified used vehicle looks 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 interest rate, but since a used car is usually cheaper than a new car, you are more likely to be approved for financing and have a lower monthly payment than if you bought it new. Just think about the term of the car loan, as financing costs can quickly skyrocket with the higher rates.
– Get pre-approvals from other lenders: This advice applies to lenders with high or low credit ratings. Take the time to get pre-approval from other lenders before going to the dealership. It gives you a better idea of what the total loan amount will be and gives you a basis on which to compare interest rates that dealer lenders may be offering.
-Fix your car while you improve your credit: In some cases, it’s best to service your current vehicle while you work on your finances. If you can keep your vehicle running for another year or two, you can save more for a larger down payment, reducing the amount you need to finance. You can also use the time to work on improving any outstanding items on your credit.
EDMUNDS SAYS: Interest rates are expected to remain high into 2023. If interest rates improve later, you can always refinance your loan to lower your payment and the total loan amount.
This story was provided to The Associated Press by automotive website Edmunds.
Ronald Montoya is Senior Editor for Consumer Advice at Edmunds.
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