The Federal Reserve’s sixth interest rate increase this year pushed new auto loan finance rates to their highest level since 2019. Rates for used cars have also hit their highest since 2010. This will affect car shoppers into 2023 as they contend with more expensive car loans overall.
According to Edmunds sales data in October, the average interest rate was about 6.3% for new cars and 9.6% for used vehicles.
“High APRs coupled with 72- or 84-month loans result in a person paying roughly a 20% premium over MSRP over the life of the loan,” said Ivan Drury, director of insights for Edmunds. On a $40,000 vehicle, with the 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.
Edmunds experts provide a few tips on how to best manage high-interest rates to help shoppers in need of a vehicle.
For those with good credit
Consider leasing: We’re not making the case here that leasing a new car is a better financial move than buying it. But with the average new car monthly loan payment currently around $700, and an increasing number of people with payments in excess of $1,000, a lease can be a more affordable method of getting into a new car. That said, restrictions on lease deals have tightened, and you’ll need to be comfortable with lower mileage limits than in the past. Additionally, it is not uncommon to find vehicles with dealer-added accessories or added fees called market adjustments.
“In a scenario where all the lease terms are the same, the monthly payment for a vehicle with an MSRP of $40,000 and a $2,000 markup will be higher than leasing a $42,000 vehicle with no markup,” said Richard Arca, Edmunds’ director of vehicle valuations and analytics. There is no residual value on markups and the customer pays for all of it plus interest over the lease term, adds Arca.
Find a vehicle with a low APR offer: While there are no longer 0% interest offers, it is worth looking into promotional offers since they tend to be lower than the average rate. If you’re willing to keep an open mind about brands and models and are able to handle a shorter loan term, you can still get a solid financing deal by today’s standards.
Consider a certified pre-owned vehicle: A certified pre-owned vehicle is a lightly used car that has been given manufacturer-recommended inspections, reconditioning and a factory-backed limited warranty. While certified pre-owned vehicles are typically more expensive than noncertified pre-owned cars, they tend to have promotional financing from the automaker’s finance arm. When you combine the lower cost to finance with the added peace of mind from the warranty, a certified pre-owned car starts to look 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 rate, but since a used car is generally less expensive than a new one, you’re more likely to be approved for financing and have a lower monthly payment than if you bought it new. Just be mindful of the length of the car loan, as the finance charges can quickly skyrocket with the higher rates.
Get preapprovals from other lenders: This advice applies to those with either a high or a low credit score. Take the time to get preapproved by other lenders before heading to a dealership. It will give a better idea of what the total loan amount will be and give you a basis from which to compare the interest rates that the dealership’s lenders may offer.
Fix up your car and credit: If you can keep a vehicle running for another year or two, it will allow you to save more for a larger down payment, which will whittle down the amount needed to finance. You also can use the time to work on improving any outstanding items on your credit.
This story was provided to The Associated Press by the automotive website Edmunds. Ronald Montoya is a senior consumer advice editor at Edmunds.