When average monthly new car payments topped $700 in May and car prices hit record highs, many potential car buyers chose to sit on the sidelines until the market normalized.
Six months later, normality looks further away than ever. The Federal Reserve continues to hike the federal funds rate, driving auto loan rates to a 20-year high, and the median transaction price for new cars remains above $48,000.
According to data company Cox Automotive, the average monthly new car payment hit another record high of $748 in October. Average payments for used cars have exceeded $550 based on a 70-month loan with a 10% down payment.
Auto research firm Edmunds lists the October average APR for auto loans as 6.3% for new cars and 9.6% for used cars. Ivan Drury, Edmunds senior manager of insights, says slight improvements in car supply and pricing are being offset by rising prices.
“Even if you save $500 on a car purchase, the interest rate could wipe that out if you don’t get the exact APR you need,” says Drury.
To illustrate Drury’s argument, financing a $46,000 car for six years at an APR of 3.1% would result in a $700 car payment. Reduce the loan amount to $42,000 at an APR of 6.3% for the same term and you still have a $700 car payment.
Matt Degen, Managing Editor at Kelley Blue Book says: “From what we’ve seen so far, it’s just getting harder and harder to find even a used car out there. And I don’t know that much will change about that. Even if inventory problems continue to recede with rising interest rates and tighter lending standards, this could just be another difficulty for people to overcome.”
High car payments impact all segments of car buying
During Cox Automotive’s quarterly auto industry conference call, Senior Economist Charlie Chesbrough said, “No buyer can escape these higher rates. They will be passed on to everyone and that means the monthly payments will keep increasing.”
In the same tender, Chief Economist Jonathan Smoke said the “deadly combination” of high car prices and high interest rates is driving lower-income, lower-credit buyers out of the auto market.
At the other end of the spectrum, Edmunds recently reported that 14.3% of consumers make monthly car payments of $1,000 or more when financing a new vehicle. The report pointed to consumer preferences for luxury brands and large trucks and SUVs as a factor behind those $1,000-plus car payments.
Drury says, “I tell people, if a $1,000 car payment makes mathematical sense to you and makes sense for your budget, then fine. But we see in our data where someone is paying $1,400 a month for 72 months at an APR of 10%. We’re talking almost $30,000 in financing fees. I cannot endorse that.”
When waiting to buy a car is not an option
26-year-old Tim Roeder of Westfield, Indiana, and his wife didn’t have car payments when Roeder’s 10-year-old car needed costly repairs. Roeder says they weren’t “very excited” about taking on an auto payment in the current market, but some planning and a job promotion helped them do it.
Roeder and his wife discussed the budget and used it car loan calculator set a maximum payout amount and researched trade-in values. Roeder took a day off from work and went to the dealership with hard numbers on his mind, but was ready to walk away. He says, “It helped me feel comfortable with the decision and pulling the trigger because I already knew what numbers I was okay with beforehand.”
As Roeder noted, getting the numbers early gives a framework to the purchase and gives buyers an opportunity to say yes or no.
Even when interest rates and car rates are rising, traditional car buying advice can still be helpful for those who can’t put off buying a car.
In a typical car market, the rule of thumb is that you should spend less than 10% of your net wages on a car payment. If that’s a stretch, try reallocating other issues. Avoid taking out a long-term loan to reduce the payment as you could be left on your head and owe more than the car is worth.
Compare interest rates from different lenders. Many lenders offer a pre-qualification that gives you interest rate estimates without hurting your credit score. Then apply for a pre-approved loan and take it to the dealer for an interest rate that can’t be beat. If you don’t do your homework and end up with a dealer’s double-digit rate, you might still be able to do it refinance at a lower interest rate and payment to another lender.
Another longstanding advice is to put down a minimum of 20% on a new car and 10% on a used car. If this is not possible, any lower amount can help reduce your payment.
Drury says, “You can get an older vehicle and luckily some are good for easily 100,000 miles. I tell people that you can get older and get deeper into the used market if you’re trying to save some money or just get a vehicle that will last you for another year or two.
If you’re buying an older vehicle, look for models that are known for their durability, check maintenance records, invest in a pre-purchase inspection, and avoid a long-term loan that could throw you upside down if the car loses value.