In a shocking turn of events, the average interest rate for auto loans have hit levels not witnessed in four decades, making the pursuit of new and used cars a considerably more expensive endeavor. Unfortunately, there’s no immediate relief in sight, as we explore the latest data from Cox Automotive to gain a deeper understanding of the true financial landscape of buying a car today, and we’ll uncover some noteworthy trends along the way. Thinking of making a purchase soon? We have an auto finance cheat sheet ready for you. New Car Interest Rates Reach an Average of 10%
The latest statistics from Cox Automotive paint a stark picture of the rising costs of car loans. The average interest rate for new cars now stands at a staggering 9.95%. Just one year ago, this rate was a more reasonable 7%, and going back to 2021, the average APR for a new car loan was hovering around 5%.Currently, new car loans offering 0% APR account for a mere 1.4% of the market, marking a significant decline from one year ago. Low APR car loans, with APRs under 3%, now make up just 5.7% of the market. This represents a substantial drop, as low-interest rate loans once constituted over 35% of new car loans in early 2022.The Actual Interest Costs for Buyers
To comprehend the real financial implications of purchasing a car, it’s essential to look beyond the sticker price. Knowing that the average transaction price of a new car sold last month was $48,451, we can calculate the interest burden that car buyers are shouldering. We consistently recommend putting down 20% when buying a car. This not only guards against the risk of being “upside down” on your loan but also means you’ll pay less in total interest. Let’s assume that today’s average buyer adheres to this advice, putting down 20%, and taking out a loan for the remaining balance, which is $38,761, at today’s average APR of 9.95%.With a 60-month car loan, the average car buyer would end up paying a total of $10,595 in interest. In other words, that new car with a sticker price of $48,451 will ultimately cost you $59,046 over five years.Used Car Rates Surge Beyond 14% APR While pre-owned vehicles may sport lower sticker prices, the cost of financing them has reached new heights. In October, the average APR for used cars has soared to 14.16%, significantly higher than the 9% APR seen in previous years. Used car prices remain stubbornly high, and the annual decline in three-year-old used car values is slowing down. This is excellent news for sellers but spells trouble for prospective buyers. A Shift Towards Captive Financing
Credit unions and traditional banks, which had long been popular choices for auto loans, are losing market share to manufacturer financing incentives offering the lowest rates. This trend is driving more business toward captive financing, which refers to loans provided by subsidiaries of car manufacturers like Hyundai Motor Finance and Toyota Financial Services. Cash is King in 2023, and Likely to Stay That Way
In 2023 and likely into 2024, cash reigns supreme as more buyers opt for this payment method amid soaring borrowing costs. In Q2 2023, 79.7% of new cars and 38.4% of used cars were financed, compared to the previous year’s figures of 83.5% for new cars and 41.5% for used cars. A worrying trend is that high auto finance rates are sidelining consumers with lower credit scores from the used car market. Subprime and deep subprime used car loans now make up just 22.04% of the market, down from 29.96% in 2020.
It’s vital for today’s car buyers to fully grasp the financial implications when signing on the dotted line. Auto finance rates have not been this high in two decades. Many drivers are now grappling with higher monthly payments due to surging interest rates, and those caught off guard may find themselves facing delinquency or even vehicle repossession. To stay well-informed and secure the best deal when buying your next car, consider utilizing CarEdge Data for in-depth market analysis. If you’re seeking personalized assistance in turning your car from a liability into an asset, explore our course that provides a step-by-step guide to achieve this through a simple, semi-passive income method: Buying a car doesn’t have to be a miserable experience. Let us help you score big wins with your next ride!