Auto loan interest rates are rising. For most of us, when buying a new or used car, agreeing on a price is only half the work (or if you have a car to sell/trade-in, a third of the work). Are you ready to go to battle for round two? That would be negotiating a fair auto loan interest rate.
Auto loan APRs are higher than they’ve been at any point in the past decade, and they’re headed even higher. How much do rising interest rates matter for today’s new and used car buyers? We crunched the numbers to find out.
The Average Car Loan Interest Rate Is the Highest Since 2009
What do you get when you combine interest rate hikes with the likelihood of an economic recession? It becomes a whole lot more expensive to borrow money. Whether you’re in the market for a new car or a new house, lenders seem to be increasing loan rates every other day in 2022.
According to new data from Edmunds, the average car loan interest rate (APR) on a new vehicle loan rose to 5.9% in September. That’s up 44% since December 2021. The last time auto loan rates were this high was right before the crash of 2009-2010.
What’s different this time around? Cars are 71% more expensive in 2022. Back in 2009, the average new car transaction price was $28,201. Today, it’s a bit over $48,000. Buyers are paying A LOT more interest in 2022, and monthly car payments are more akin to second mortgages.
In September 2022, the average amount that new car buyers financed was $41,347. Thinking about stretching that loan term as far out as possible? That adds up to a total of $7,849 in interest paid over 72 months. Ouch!
Used Car Loan Rates Rising Most
The average used car loan interest rate has shot up to 9.2%, adding thousands to the total cost of borrowing money to buy a car.
In September 2022, the average amount that used car buyers financed was $31,366. That adds up to a total of $9,566 in interest paid over a 72-month loan term.
What if you shop around and get pre-approved for a 7.0% APR instead of the average of 9.2%? Over 72 months, you’d SAVE a grand total of $2,429 in interest, all by simply shopping around and getting some more loan rate offers.
The Federal Reserve Is About to Raise Rates Again
When ‘The Fed’ meets again in early November, they’re almost certain to announce another rate hike. Whether it amounts to 75 basis points or less is of little concern. What’s certain is that auto loan rates will continue to rise in November.
Based on our own analysis at CarEdge, we expect the average car loan interest rate to climb higher to between 6.5% (for new cars) and 10.5% (for used cars) in November.
Remember that these are expected averages, so there will be better (and worse) auto loan offers out there. Don’t settle for your first auto loan rate offer. Shop around!
How to Save Money on Auto Loan Interest, Even As Rates Rise
There are still ways to save big-time on auto loan interest. These are the biggest ways to keep more money in your pocket:
- Shop around for the lowest interest rate. Pre-approval does impact your credit score, so it’s best to apply for all of your pre-approvals at the same time (or same week at least) right before you plan to buy the car.
- Go for a shorter loan term! At today’s average new car loan interest rate of 5.9%, the difference between financing $35,000 with a 48-month loan and a 72-month loan is $2,267 in interest paid. That’s not pocket change!
- Spend less, and/or put more down. It’s easier said than done, but consider borrowing less if you want to pay as little interest as possible. You could buy a less expensive car, put more money down for your down payment, or both.
- Refinance your loan. Yes, even as interest rates are rising, if you get stuck with a bad loan, or improve your credit over time, you should consider refinancing your auto loan. Go to a local credit union so that you don’t get hit with fees from online websites.
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