How to Mitigate Rising Auto Loan Interest Rates

The Federal Reserve issued its last interest rate hike in early November. It marks the sixth increase this year and has pushed new car loan financing rates to their highest level since 2019. Used car rates also hit their highest level since 2010. This will affect car buyers in this holiday season and in 2023 as they have to deal with fewer low APR incentives and more expensive auto loans in general.

Based on Edmunds sales data for October, the average interest rate was around 6.3% for new cars and 9.6% for used vehicles.

“The high APRs coupled with 72 or 84 month loans causes an individual to pay approximately a 20% premium over MSRP over the life of the loan,” said Ivan Drury, Edmunds chief insights officer. On a $40,000 vehicle, with a current 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 effectively wipe out any value you’d get from trading in that vehicle in the near future to take advantage of high used-car values.

Edmunds experts provide some tips on how to best manage 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 a better financial measure than buying it. But with the average monthly payment on a new car loan currently hovering around $700, and a growing number of people with payments over $1,000, a lease may be a more affordable method of buying a new car. That being said, the restrictions on leasing agreements have tightened, and you’ll need to be comfortable with lower mileage limits than in the past. Also, it’s not uncommon to find vehicles with dealer-added accessories or additional fees called aftermarket adjustments.

“In a scenario where all lease terms are equal, the monthly payment for a vehicle with a $40,000 MSRP and a $2,000 surcharge will be higher than leasing a $42,000 vehicle with no surcharge,” said Richard Arca, director of vehicles for Edmunds. evaluations and analysis. There is no residual value in the margins and the client pays everything plus interest over the lease term, Arca adds.

-Find a vehicle with a low APR offer: While there are no 0% interest offers anymore, it’s still worth investigating current promotional offers, as they tend to be lower than the average rate. If you’re willing to keep an open mind about makes and models and can handle a shorter loan term, you can still get a financing deal that’s solid by today’s standards.

-Consider a Certified Pre-Owned Vehicle: A Certified Pre-Owned vehicle is a gently used car that has had a series of manufacturer-recommended inspections, a complete overhaul, 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 of financing with the added peace of mind of a warranty, a Certified Pre-Owned car starts to look more promising.

FOR THOSE WITH LOWER CREDIT SCORE

-Consider buying an older used car: The average interest rate on a used car is higher than the rate on a new car, but since a used car is generally less expensive than a new one, you’re more likely to get approved financing and have a lower monthly payment than if you bought it new. Just keep the length of the car loan in mind, as finance charges can skyrocket quickly with the higher rates.

-Get pre-approved from other lenders: This advice applies to those with a high or low credit score. Take the time to get pre-approved from other lenders before heading to the dealership. It will give you a better idea of ​​what your total loan amount will be and give you a basis for comparing interest rates that dealership lenders may offer.

-Fix your car while you fix your credit: In some cases, the best thing to do may be to keep your current vehicle while you work on your finances. If you can keep your vehicle running for another year or two, it will allow you to save more for a larger down payment, which will reduce the amount you need to finance. You can also use the time to work on improving the outstanding items on your credit.

EDMUNDS SAYS: Interest rates are expected to stay high through 2023. Later, when rates improve, you can always refinance your loan to lower your payment and lower the total loan amount.

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This story was provided to The Associated Press by the Edmunds automotive website.

Ronald Montoya is a senior editor for consumer advice at Edmunds.

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