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What Do Interest Rates Mean For Car Buyers?

Last updated Nov 13, 2023

Following the ups and downs of the past two years, automakers, dealers and buyers have seen it all. Low demand in 2020, not enough cars to sell in 2022, and wild swings in pricing. What about the consumer perspective? Things are changing quickly, and it can be hard to keep track. What do interest rate hikes mean for car buyers in 2023? We spoke with CarEdge car buying expert Mario Rodriguez to find out.

How will higher interest rates impact new car buyers? 

2022 Tesla Model 3
2022 Tesla Model 3

There are very few automaker or dealer incentives right now. The sellers have the upper hand in today’s market. They’ve raised MSRPs, and additional dealer markups have piled on. Selling new cars, dealers can toy with the profit equation. Both front-end and back-end profit scenarios are on the table for a dealer. 

Either they could increase the car’s price and drop interest rates via captive lending, or take the opposite approach and keep car prices the same but raise interest rates for buyers. When it comes to interest rates, however, NEW car buyers probably won’t see much of a change, at least after this first Fed rate hike. 

Automakers can afford to subsidize the small rate increases because of captive lenders, not to mention the record profits they make per vehicle sold right now. There’s been a lot of inflation, but not to the magnitude of the MSRP hikes we’ve seen.

What is a good interest rate for a new car?

As of November 2023, attractive financing rates for new cars range from 0.0% to 2.9% APR. Black Friday deals feature several low APR offers.

Drivers with great credit scores should keep an eye out for anything below 3% APR for new car buyers.

How will higher interest rates impact used car buyers?

dealership

This is where buyers will feel the pinch. Used cars sell for less (on average), and a lot more math is involved with profit margins for dealers. Private party lenders are quicker to reflect baseline rate hikes. It might take a few months for new car loan rates to rise noticeably, however used car loan rates will rise immediately.

What is a good interest rate for a used car?

Through a credit union, used car buyers with great credit scores can secure a used car loan for under 7% APR. As of November 2023, the average used car loan rate is 14% APR.

It’s important to bear in mind that a higher interest rate will cost buyers who demand an expensive vehicle more than if a cheaper vehicle was to be purchased. A 6% interest rate will result in about $6,000 in total interest paid for a $40,000 loan over 60 months, but just $2,400 for a $15,000 loan over the same term.

Will there be more interest rate hikes?

More interest rate hikes are likely in early 2024. The latest consumer sentiment and spending data shows that Americans are increasingly getting used to a high rate of inflation. That’s not a good sign, and leads many experts to think that the US Federal Reserve will issue at least a few more rate hikes to combat inflation.

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