Financing rates on new cars are rising. Here’s what you need to know.

Shopping for a new vehicle right now will set you back, as financing rates on new cars rise. New, financed vehicles saw an average annual percentage rate climb from 4.1% in the fourth quarter of 2021 to 6.5% in the fourth quarter of 2022.  This means if you’re in the market for a new vehicle, there are some things you should know before you make a purchase. 

Why are rates rising?

Rising auto loan interest rates drive share of $1,000+ monthly payments to record levels in Q4, according to Edmunds, https://www.edmunds.com/industry/press/rising-auto-loan-interest-rates-drive-share-of-1000-monthly-payments-to-record-levels-in-q4-according-to-edmunds.html.

At the end of 2021, car payments averaged around $659. At the end of 2022, the average car payment was $762, with 15.7% of people paying over $1,000 a month. Average APR has increased, too, from 4.1% in Q4 of 2021 to 6.5% in Q4 of 2022. Why?

High car prices

New vehicles cost .9% more, according to Kelley Blue Book. 

Supply chain issues affected most industries during the pandemic, including the auto industry. Shortages of semiconductor chips, used in new cars, meant that production of new vehicles slowed dramatically, and the stock of new cars decreased. With fewer new cars on the lot to sell, many consumers bought used cars, instead. With the demand for both new and used cars unable to be met, prices for both rose. 

Now that supply chain shortages are being sorted out, pre-pandemic supply and demand balances are resetting. During the shortage, manufacturers and dealers stopped giving so many incentives to purchase because they didn’t need to. Consumers may be hopeful for the return of incentives like lower interest rates and reduced sale prices, but they may have to wait to see “who blinks first,” as Brian Finkmeyer, of Cox Automotive, says. In order to grow sales volume, manufacturers and dealerships will need to offer prices that appeal to a wider pool of buyers–buyers who are experiencing inflation in every other area of their lives as well. 

High interest rates

The Federal Reserve started raising interest rates at the end of last year to curb inflation. The pandemic threw a wrench in the economy, and war in Ukraine sent energy prices soaring.  Generally, raising rates slow the economy, as investing and taking on large projects is more costly, which the Fed hopes will help tame prices. According to the Economist Intelligence Finance Outlook Report of 2023, raising rates is positive for financial firms, as they lead to wider interest level spreads. 

This means that it’s more expensive in general to get financing in any industry. Auto credit was harder to get in December compared to November. The good news is that according to the OECD forecasts as of December 2022, inflation is expected to continue to fall gradually over the next year and a half. Until price pressures ease, the Fed is unlikely to pause interest rate hikes. 

Ways you can potentially decrease your payments if you're purchasing a car

If you need to purchase a car this year and are worried about financing rates on new cars, we have some suggestions to keep your payments manageable. Anytime you purchase a car you need to do your homework. Before you go for it, make sure you understand your credit rating and have done all you can to get it as high as possible. Once you’re ready, you might want to consider the following tips:

Purchase a new car, rather than used

Used cars have a high-interest rate, much higher than new cars. This is because used cars are associated with more risk; they’re more likely to break down and require costly repairs.

Provide a larger down payment

When you purchase, consider a larger down payment. The interest on 30k will always be less than the interest on 20k. In fact, down payments have been increasing. In the Q4 of 2021, the average down payment was $5,921. In Q4 of 2022, the average down payment for a new car was $6,780. 

Pay more on your loan each time

If you’re in a position to pay more every month, do so. The quicker you pay off the loan the less time interest has to accrue. 

Rate shop

Credit score companies will understand if several financiers take a look at your credit within a 45 day window. While you may see a dip in your score in the short term, your score will bounce back. 

If you have a high payment on your current car

If you’re burdened by the monthly payments now, you do have options. You don’t have to feel stuck in a situation that’s untenable. Remember that reneging on your obligations and failing to pay is always the worst thing to do when it comes to your credit score and future financial health. Instead, think about the following ideas to get your payments under control: ‍

Refinance

For your current vehicle consider refinancing, especially if your credit score has improved since taking on the loan. If you can find a lower rate to pay off the remaining portion of your loan, you’ll pay less in the long run. 

Sell or trade In

Selling or trading your current care for a less expensive one will definitely reduce your payment. 

Lease a car

Leasing a car often means your monthly payment will be less than if you bought that same car. Often you’ll be able to afford the payments for a more expensive car than you’d be able to buy outright anyway. And since cars depreciate in value, you always sell the car for less than you paid initially. Don’t take on that burden at all. 

Talk to your lender

When you talk to a lender about your situation and what you’d like to do, they can guide you towards the best option for your situation, and help you manage payments.

What is the future of interest rates in 2023 (can it get better?) 

New Vehicle inventory levels are improving, so Cox Automotive forecasts a 3% year-over-year sales growth in 2023. They also think that because auto loan rates are so high, all cash deals will continue to rise, favoring wealthy customers and placing downward pressure on dealership profits. 

Interest rates will stay high as long as inflation stays high. The EI financial report suggests that government agencies may step in and help people handle the high cost of living. Some states have issued stimulus checks, and European lawmakers have plans to cap energy costs. Inflation is due to slow over the next year and a half, and hopefully we’ll see interest rates return to more reasonable levels at the same time.