What are interest rates?
Let’s say you want to borrow 25k for a new car. The bank can lend you 25k, but you’re going to have to pay them for the service of lending you the money. Or let’s say at the end of the year your company gives you a 1k bonus, and you put that into savings. The bank will pay interest because they’re using that money to do other things.
Interest is calculated on an ongoing, monthly basis, based on the amount of money being borrowed, and it’s expressed as a percentage.
Interest rates can be 0% (no interest charged) and up. Generally, you’ll see between 2%-12% interest rates for car loans. If you see an interest rate of 30%, think carefully before agreeing to a loan like that, as you’ll pay significantly more than you would have originally, and you may not be able to pay that loan back at all because the interest will just accrue and accrue and accrue.
The Economic Climate in the USA and Its Effect on Cars
The pandemic really rocked the car industry. With factories shut down and travel limited, new car manufacturers couldn’t get the supplies they needed to produce the volume of new cars they usually produced.
But people still wanted to buy cars. With a lack of new cars available, consumers turned to used cars, which shot up in price to meet the new, high demand.
Now that supply chains are evening out, the production of new cars is getting back to normal, and therefore the demand for used vs. new cars is returning to its pre-pandemic levels, everything should be fine, right? Not so fast–the Bureau of Labor Statistics reports that the price of new cars has increased by 12.2 percent from previous years. The same goes for used cars, as they have risen to 40.5 percent compared to their old prices. Partly this is because the new car industry has increasingly become the luxury car industry. When a manufacturer can only produce a limited number of cars, they choose to produce high-end vehicles with all the bells and whistles that will create the most profit. In 2021, the luxury share of the new-vehicle market was 16.4%. In 2022 that increased to 17.8%, a major increase.
But the pandemic also created accelerated global inflation. If supplies are harder to get, workers are harder to keep, and new supply chains need to be set up, it’s just more expensive to create, move and sell a single car. The federal reserve is trying to curtail this inflation. That’s where rising interest rates come in. When the Fed raises interest rates, they disincentivize large, risky purchases. That means that companies have to lower the prices of their product to get consumers to buy them.
”The RAV4 and the F-150 have long been popular models, but they’re getting more expensive.”
The RAV4 is a practical and efficient Toyota SUV. It offers plentiful cargo space, 32-35 hwy mpg fuel efficiency, and a 203-horsepower engine. It’s long had a practical base price, too, which made it a sensible choice. Currently, the 2023 RAV4 starts at around 29k for the base model. In 2016, the base model for the RAV4 was $24,350.
The F150 is a pickup truck that is a continual best-seller. The base trim level can tow about 8,200 pounds and can get about 26 hwy mpg fuel efficiency, but other trims can tow more, get better gas mileage (there’s a hybrid and all-electric version for those so inclined) or offroad with more ease. Currently, the base trim for the F-150 will set you back $35,680. It's 2016 price? Somewhere in the ballpark of $27,500.
We expect prices to rise every year, but most paychecks aren’t rising commensurately with the increased cost of these popular vehicles. Add this to the increased cost of interest rates, and it’s more expensive now than ever before to purchase a car.
In fact, one in six people who recently financed a new car committed to monthly payments of $1,000 or more, which is the highest on record. If you committed to a high interest rate – 12% or more, you may be able to refinance your current vehicle and find a much better option that could lower your monthly costs significantly.
Time to go off the beaten path with car choice?
If you’re looking for comparable alternatives that will ease the strain on your wallet, consider some less popular alternatives. Not only might dealers have more incentives to move less popular models, but you might be able to find better pricing altogether.
Instead of the F-150, think about the 2023 Ford Maverick, a “workhorse pickup” with a price point starting at only $23,690. Or consider the 2023 Toyota Tacoma, a “tough as nails” pickup which comes in at 29k.
And if you’ve recently purchased, refinancing your loan is a great way to take advantage of the lowest interest rates. Ask our team for a quote today to see how we can save you money.