Car buyers just can’t catch a break these days. Vehicle prices climbed sharply during the pandemic, and now the cost of financing a new set of wheels is going up.
Even if prices ease, interest rates on car loans likely will climb higher, at least for a while, making this an inopportune time to replace a vehicle, financing experts say.
In an environment like this, it pays to shop around for the best possible rate. Dealerships may subsidize low-interest rates to generate sales, and local banks and credit unions may offer lower rates to loyal customers. Paying down debt will improve your credit score, which should qualify you for a better interest rate, and saving up a big down payment will reduce the amount you need to borrow.
Even so, if you can put off buying a vehicle, it’s probably a good idea. A majority of economists now predict a recession within the next year, and car makers usually pile on rebates and incentives during a downturn.
The average interest rate on a five-year, $40,000 loan for a new car is 5.78%, for a $769 monthly payment, according to Greg McBride, chief financial analyst at Bankrate.com. Drivers taking out a new-car loan in November will pay an average of $35 more a month than those who did so in January, when the average interest rate was 3.86%, he said.
The average amount financed for new vehicles in the third quarter set a record at $41,347, up from $38,315 in the same quarter last year, according to Edmunds.com, an online guide for car shoppers. As a result, 14.3% of consumers who financed a new-vehicle purchase in the third quarter have a monthly payment of $1,000 or more, the highest percentage ever recorded by Edmunds. It was 8.3% in the same quarter last year.
Jessica Caldwell, executive director of insights at Edmunds, said subsidized interest rates offered by auto makers provide “a bit of relief, but even those are far less generous than before. Consumers heading into the car market may be aware of high prices but also need to brace themselves for a different experience in the [finance and insurance] office.”
The Federal Reserve plans to keep raising rates to rein in inflation. That means the average monthly payment for new cars has yet to peak, according to McBride, of Bankrate. Still, he said rising interest rates have had a “modest” impact on monthly payments, while higher prices have been “the real game-changer.”
“We do expect that as the Fed continues to raise rates, we will continue to see increases in car-loan rates,” McBride said. “Shopping around could be the difference between paying 5% and paying 10%, so there’s a real benefit to shopping around.”
There are several simple ways car buyers can reduce their monthly payments, including paying down debt to boost their credit score, saving for a large down payment and trading in a vehicle. “If you put down a larger down payment, the lender is bearing less risk,” McBride said. “You’ve got more skin in the game, and that could lead to more favorable terms.”
Car shoppers should ask dealerships about special financing options to promote sales, then check with their bank or credit union and ask for a discounted rate as a loyal customer, according to Lamar Brabham, chief executive of Noel Taylor Agency Financial Services. If they can’t find a better deal by shopping around, consider private financing, he said.
“With the banks paying very little in interest, you may find an individual looking to improve their returns,” Brabham said. “You’d be shocked at the number of people who have large amounts of cash in checking and savings accounts. A close family member or friend may be happy to lend you enough to buy a car. It could be good for you and them.”
If you’ll need to finance your next car purchase, boosting your credit score can reduce your monthly ownership costs in two ways. You will have lower borrowing costs, and in most states, an excellent credit score is worth a big break on auto insurance, according to Chase Gardner, a researcher at Insurify, an online platform for comparing insurance policies.
Those with scores of 720 or higher pay an average of $1,387 a year in insurance, compared with $1,639 for those with scores between 680 and 719. That figure climbs to $1,919 for drivers between 580 and 679, and below 580, the average jumps to $2,378, according to Insurify.
That is one reason why “boring is better when it comes to your choice of vehicle,” Gardner said. Used cars, especially lower-end models such as compact sedans, cost less to purchase and to insure, reducing ownership costs, he said. Making regular payments on a modest car now may enable you to get the car you really want next time, he said.
“Improving your credit score is a process, but over time, it’ll make borrowing cheaper and also car insurance cheaper,” Gardner said.
Write to [email protected]
Source: https://www.barrons.com/articles/buy-a-car-used-new-loan-rate-deal-51669401171?siteid=yhoof2&yptr=yahoo