Edmunds: How to mitigate rising interest rates on auto loans

A potential buyer examines a 2022 CR-V sport utility vehicle in the showroom of a Honda dealership, Thursday, Nov. 3, 2022, in Highlands Ranch, Colo. (AP Photo/David Zalubowski, File)

The Federal Reserve issued its latest interest rate hike in early November. This is the sixth increase this year and pushed new auto loan finance rates to their highest since 2019. Used car rates also hit their highest since 2010. This will affect car buyers this holiday season and into 2023 as they face fewer low annual rate incentives and more expensive auto loans overall.

According to Edmunds sales data in October, the average interest rate was around 6.3% for new cars and 9.6% for used vehicles.

“High APRs associated with 72 or 84 month loans cause a person to pay a premium of around 20% over the MSRP over the life of the loan,” said Ivan Drury, chief information officer at Edmunds. On a $40,000 vehicle, with a current average APR of 6.3% and a term of 72 months, that translates to $8,139 in finance charges, plus sales tax and title fees. Drury adds that this additional cost will effectively negate any value you would get from trading this vehicle in the near future to take advantage of high used car values.

Edmunds experts provide some tips on how best to manage high interest rates to help buyers who need a new or used vehicle in the months ahead.

FOR THOSE WITH GOOD CREDIT

Consider leasing: We’re not claiming here that leasing a new car is a better financial decision than buying one. But with the average monthly loan payment for a new car currently hovering around $700 and a growing number of people with payments over $1,000, a lease may be a more affordable method of buying a new car. That said, restrictions on leases 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 additional charges called market adjustments.

“In a scenario where all 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 without markup,” said Richard Arca, director of vehicles at Edmunds. assessments and analyses. There is no residual value on mark-ups and the customer pays the full plus interest over the term of the lease, Arca adds.

-Find a vehicle with a low APR offer: If there are no more 0% interest offers, it is always worth looking into current promotional offers as they tend to be lower than the average rate . If you’re willing to keep an open mind about makes and models and are able to manage a shorter loan term, you can still get a solid finance deal by today’s standards.

-Consider a Certified Pre-Owned Vehicle: A Certified Pre-Owned vehicle is a lightly used car that has undergone a number of manufacturer-recommended inspections, extensive reconditioning, and a limited warranty factory. Although certified used vehicles are generally more expensive than non-certified used cars, they tend to have promotional financing from automaker finance. When you combine the low cost of finance with the added peace of mind of warranty, a certified used car starts to look more promising.

FOR THOSE WITH LOWER CREDIT SCORES

– Consider buying an older used car: the average interest rate for used cars is higher than for new cars, but since a used car is generally cheaper than a new one, you are more likely to be approved for financing and have a lower monthly payment than if you bought it new. Just be aware of the term of the auto loan, as finance charges can quickly skyrocket with the higher rates.

-Get pre-approvals from other lenders: This advice applies to those with high or low credit ratings. Take the time to get pre-approved by other lenders before going to the dealership. This will give you a better idea of ​​the total loan amount and give you a basis for comparing the interest rates the dealership’s lenders may be offering.

– Fix your car while you fix your credit: In some cases, the best thing to do may be to maintain your current vehicle while you work on your finances. If you can keep your vehicle running for another year or two, that will save you more for a larger down payment, which will reduce the amount you need to finance. You can also use the time to work on improving outstanding items on your credit.

SAYS EDMUNDS: Interest rates are expected to stay high through 2023. Ultimately, when rates improve, you can always refinance your loan to lower your payment and total loan amount.

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This story was provided to The Associated Press by automotive website Edmunds.

Ronald Montoya is Consumer Advice Editor at Edmunds.

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