What you can do
Here are a few ways to manage rising auto loan rates.
If you have a high credit score:
1. Reconsider leasing: In theory, a lease should have a much lower monthly payment compared to financing the vehicle. But these days, due to a lack of incentives, low inventories and the difficulties of finding the so-called "lease special" trim levels, the gap has closed significantly. In April 2022, the difference between payments on the average financed vehicle versus the average leased vehicle was about $70, according to Edmunds. A few years ago, the difference would've been twice as much. At this point, though the payments will be slightly higher on a financed vehicle, at least you'll have something of value at the end of three years, versus someone who leased and needs to start the shopping process from scratch. If you choose to stick with leasing because you can write it off or you simply like being in a new car every few years, our advice remains the same: Look for lease specials, keep the down payment low and be mindful of the mileage limits.
2. Find a car that has a low APR offer: While there are far fewer 0% interest offers than in the past, it doesn't mean they've dried up completely. Plus, there are still a number of low APR deals for 1.9% or 2.9%. If you're willing to keep an open mind about brands and models as well as consider models that you might not be familiar with, you can still get a solid financing deal.
3. Consider a certified pre-owned vehicle:
A certified pre-owned vehicle (CPO) is a lightly used car that has been given a number of manufacturer-recommended inspections, a thorough reconditioning and a factory-backed limited warranty. While CPO vehicles are typically more expensive than non-CPO cars, they tend to have promotional financing from the automaker's finance arm. When you combine the lower cost to finance with the added peace of mind from the warranty, a CPO car starts to look more promising. And you probably won't be missing out on modern amenities. "Unlike five to 10 years ago," notes Edmunds' senior manager of insights Ivan Drury, "today's CPOs are likely to have many of the creature comforts you'd look for in the new car, like Apple CarPlay and backup cameras.”
If you have a low credit score:
1. Consider buying an older used car: The average used-car interest rate is higher than the new-car rate, but since a used car is generally less expensive than a new one, you're more likely to get financed and have a lower monthly payment than if you bought new. Just be mindful of the length of the car loan: An 84-month loan on a used car means you could have a very out-of-date vehicle on your hands by the time you pay it off.
2. Get preapprovals from other lenders: This advice applies to those with either a high or a low credit score. Take the time to get preapproved by other lenders before you head to the dealership. It will give you a better idea of what the total loan amount will be and also give you a basis to compare the interest rates that the dealership's lenders may offer.
3. Fix up your car while you fix up 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 so, it will allow you to save more for a bigger down payment, which will whittle down the amount you need to finance. You also can use the time to work on improving your credit. Run a copy of your credit report to see which items need attention. In general, you'll want to pay off debt with the highest finance charges first.
Buy now or wait for the rates to drop?
The experts forecast a few more rate hikes this year, so if you're in need of a new vehicle, it might be best to shop sooner rather than later. If you were hoping for rates to drop, it could take another year or two. Use our tips to minimize the impact on your wallet. And if interest rates have improved in a few years, you can always refinance a loan to bring down your payment and total loan amount.