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Buying a Car When Interest Rates Are High

Tips for managing high-interest auto loans


If you're car shopping and you haven't purchased a vehicle in a few years, you may be in for a shock when you apply for an auto loan. You'll not only have to contend with higher car prices but potentially a significant increase in interest rates, too.

As of this writing, auto loan rates have not yet shot up in 2022 like mortgage rates. Edmunds data for April 2022 shows that the average annual percentage rate (APR) was 4.7% for new financed vehicles and 8.0% for used vehicles. That's largely unchanged from a year ago (4.6% and 8.2%, respectively). Looking back a few years, the average new-vehicle APR was actually quite a bit higher in April 2019 (6.3%), with the used-vehicle APR slightly higher as well (8.8%).

But with more interest-rate hikes on the Federal Reserve's horizon, it's likely that financing a car will only get more expensive in the near term. In addition, car prices remain sky-high as automakers grapple with semiconductor shortages and other issues. Here's what this means for you if you're in the market right now shopping for a car.

For buyers with a low credit score, even small upticks in interest rates can make a significant difference in the total cost of a loan.

For buyers with a low credit score, even small upticks in interest rates can make a significant difference in the total cost of a loan.

What this means for you

If you have a high credit score, rising interest rates shouldn't have much impact on you. Sure, there may be fewer low-rate loans available, but generally, you won't have a problem getting approved or finding a loan with a good rate, even though the rate may be higher than what you remember from previous years.

But it's a different story if you have a low credit score. When you couple high vehicle prices with the trend toward longer-term loans, higher interest rates can make a significant difference in the cost of the loan, as you'll see shortly.

Here's a general rule to apply to your own credit situation: On a $30,000 vehicle financed for a common 72-month loan, the finance charges will rise roughly $1,000 for every percentage point increase in the loan. Take a look at the chart below to see how the interest rate impacts the total price of the loan. If you need something more specific to your numbers, take a look at the Edmunds loan calculator to get a closer approximation of your monthly payment.

If you'd like to see the average interest rate in your state, take a look at our interactive "Car Loan Rates in the U.S. for Used and New Cars" page. Click on your state to see the average APR in the top vehicle categories: SUVs, Sedans, Trucks and Electric Vehicles.



Edmunds logo
Amount
Financed
Loan
Term
APR
Monthly
Payment
Total Interest
Over Life
of Loan
Total Amount Paid
Over Life
of Loan
  1.0%$429$921$30,921
  2.0%$443$1,861$31,861
  3.0%$456$2,818$32,818
  4.0%$469$3,794$33,794
$30,00072 months5.0%$483$4,787$34,787
  6.0%$497$5,797$35,797
  7.0%$511$6,826$36,826
  8.0%$526$7,872$37,872
  9.0%$541$8,935$38,935
  10.0%$556$10,016$40,016

Another important item to note is that the average amount financed has been on the rise. This is due to a mix of factors that include inflation, customer preference for pricier SUVs, and the generally rising cost of new cars. In 2017, for example, the average financed new car loan was around $30,500, according to Edmunds sales data. Compare that to the first quarter of 2022, when the average financed new car loan was approximately $39,340. Loan terms within that same timeframe have more frequently stretched to 72 and 84 months, an indicator of what people are doing to cope with increasing costs. And longer loans mean more money paid in finance charges and a longer time to gain equity in the vehicle.

The numbers shown above reflect the average in the car-buying market, but if you have bad or what the industry calls "subprime" credit — roughly, a FICO credit score of 501-600 — you could easily pay twice the average APR (roughly 9%-10%, according to data from Experian) on a new vehicle loan, which means thousands more in finance charges.

There's more bad news for a car buyer with subprime credit looking to buy used. It is not uncommon to see interest rates upward of 16%. Using the same $30,000 figure from above, this person would pay $16,854 in interest charges alone, along with a wallet-squeezing monthly payment of about $651. In reality, this person would not be able to handle a car loan of this magnitude and would need to opt for a cheaper new car or a much less expensive used one.

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.


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