Interest rates are high and could get higher. That means auto loans are expensive. In fact, auto loan interest rates are the highest they've been since 2007, when the world was heading into a massive financial crisis. Rates average 7.4%, according to Edmunds, up 3 percentage points in just one quarter.
High interest rates plus still-high car prices mean the average monthly payment for a new car is the highest it's ever been, at $736, according to Edmunds. And, for some vehicle types, the numbers are even higher. More than 70% of buyers of new large SUVs now have monthly payments over $1,000.
You might think these high costs would slow car purchases, but that has not been the case. Because of Covid-related manufacturing disruptions over the last couple of years, Americans have been denied access to new cars for a long time. Now, like hungry diners surging towards a fresh, hot buffet, they're digging in, record payments notwithstanding.
It's not totally irrational, either. Given recent developments in the economy, waiting longer might not help.
"Are you concerned that new vehicle or used vehicle prices could be coming down a little bit, but interest rates still going up so that monthly payment could just keep getting higher and higher?" said Kevin Roberts, director of analytics at CarGurus. "You may just need to strike at this current moment."
If you feel you just have to do it now, here are some expert tips on how to buy a car in these times.
Prepare first
First, understand your own situation, experts advise.
Find out how much your current vehicle will be worth be as a trade-in. There are a number of sites on-line where you can get a quick appraisal, including Edmunds.com and KBB.com.
If you're still making payments on it, advised Roberts, find out whether you're "under water," meaning you owe more money on the vehicle than the car or truck is currently worth. If you haven't been making payments for very long, that could be the case. If so, the remaining debt on your current vehicle will just get rolled into the payments on the new one, making your monthly payments even higher.
Second, shop around for the best auto loan rate and don't just count on the dealership to get you the best financing deal. Check with your own bank, a credit union or another financing outlet to try to get the best rate before you start shopping. Then, if the dealer has an even better option for you, take it. If not, you have a backup plan.
While many automakers used to offer zero-percent financing deals, that's becoming extremely rare and, when available, usually requires a nearly flawless credit rating.
"Zero-percent financing commercials might still be airing to draw shopper attention, but the reality is those deals are all but gone for the average car shopper," said Ivan Drury, Edmunds' director of insights.
Even before you start shopping for credit, though, check on your credit rating, advised Matt Jones, senior director of brand and industry at TrueCar.com. If you have some time, take steps to clean it up a bit.
Courtney Alev, consumer financial advocate at Credit Karma, recommends paying down your credit cards so that you're using less than 10% of the credit that's available to you. Another way to reduce what's called "credit card utilization" is to ask credit card companies to increase your credit limit so you'll be using less of that higher credit limit. She also recommends making your auto loan inquiries within a two-week window of one another, so that those multiple inquiries will count as one for credit reporting purposes. Generally, multiple credit inquiries will dent your overall rating.
Keep it short
People often try to reduce their monthly payments by taking out longer loans. Spreading the payments over more years can keep the monthly amount lower, but it means you're paying more in interest. So keep that in mind while considering the short-term benefits of lower payments.
Leasing is another way to keep monthly payments down. That's because, in a lease, you're only paying for the amount of value the vehicle loses between the time you get it and the agreed-upon date that you give it back. There is an interest rate on those payments — in leasing lingo, the "money factor" — but because the core amount you're paying is less, the payments are lower.
"Leasing gives you the flexibility to reevaluate the market in 2 to 4 years when interest rates may cool down," said Joseph Yoon, a consumer insights analyst at Edmunds.
If you have the money on hand, you can, of course, avoid paying interest altogether by just paying cash for your vehicle and not bothering with a loan or lease, at all.
Keep an open mind
Besides looking at leasing and other financing options, also consider the vehicle you might want to buy. This is especially true if you've traditionally been a luxury buyer. Don't just think of it as going downmarket. In recent years, many mainstream auto brands have stretched upmarket and now offer models with features and trim that could match — or nearly so — what you're used to from luxury brands. And, if you don't feel the need to pay for a luxury badge, they can cost thousands less.
Also, take it easy on the options, advised TrueCar's Jones. See if the base model version could be good enough for you.
"Today's vehicles come very well equipped," he said. "Even lower model vehicles come jam packed with good stuff."
And if you've been thinking about getting an electric vehicle, now would be a very good time. Automakers need to sell these models and there are substantial tax credits available on many of them, too.
"If you can make it work, discounts and incentives can be found on new EV models in today's market," said Jones. "Also, day-to-day cost of ownership will likely be lower."
It's not just new ones: Tax credits are also available on used EVs — so there are big savings in that market, too.
Cross state lines
Cars don't cost the same everywhere, so you should consider shopping further from home than you might be used to. Even if there are shipping costs — or travel costs — required to bring the car to you, they could well be worth it.
CarGurus' Roberts gave the example of used 2019 Toyota Rav4 vehicles that cost, on average, $2,000 less in Boston than in New York City, just a few hours away.
The same can be true with new cars, as well. While the sticker price of a new model won't vary from one market to another, the final negotiated selling price can be lower in one market than another, said Tyson Jominy of J.D. Power and Associates. (These differences are less, now, than they were when car prices were heavily inflated a year or so ago.) Also, car companies offer different region-specific incentives to help dealers move certain models that may not be selling well in their area. One way to to take advantage of these price differences is simply to widen your search area when looking on various car-shopping websites.
