Buying a used car remains expensive even though bottlenecks in the supply chain have eased, bringing the average loan amount to $28,506.
Consumers still rely heavily on financing for their car purchases and the average loan amount increased by 8.59% year-on-year, according to credit scoring company Experian.
However, there are some glimmers of light.
“Since the start of the inventory shortage, used vehicle values have risen at an astounding rate, and that appears to be slowing down, which is a positive sign for consumers looking to purchase a vehicle,” said Melinda Zabritski, director senior automotive financial solutions at Experian. “While average loan amounts and monthly payments continue to grow, there are many contributing factors, such as rising interest rates.”
The amount consumers are borrowing to finance a used car is increasing at a slower rate. During the third quarter of 2021, Experian reported a year-over-year increase of 21.37%. In the third quarter of this year, the amount rose by 8.6%.
Used cars have seen their values soar as the number of available new cars has dwindled due to supply chain challenges stemming from the global pandemic of crimped semiconductor chip supply.
A lack of new inventory has led many drivers to buy used cars, but high demand has driven up prices.
The average loan amount for a new vehicle also saw a significant increase, rising to $41,665 in the third quarter of 2022 from $37,753 in the third quarter of 2021.
Used car loan interest rates top 9%
Interest rates on new and used car loans continue to rise due to the Federal Reserve raising interest rates in an effort to curb inflation.
The average interest rate during the third quarter was 5.16% for new vehicle loans and 9.34% for used vehicles, compared to 4.09% and 8.12% in 2021, according to the data from Experian.
“Interest rates have risen for all borrowers this year — consumers, businesses and governments,” Greg McBride, chief financial analyst at Bankrate, a New York-based financial data firm, told TheStreet.
“Used car rates are at an 11-year high, as are new car loan rates,” he said. “To put that into context, the Federal Reserve’s benchmark rate is the highest it’s been since 2008, so auto loan rates haven’t risen as quickly.”
The reason interest rates are higher for used car loans is because there is a higher risk of default or default on a loan for an older vehicle, McBride said.
“If the car breaks down, it’s less likely to be under warranty and if the vehicle is in the repair shop, the borrower may have trouble getting to work or making the payment,” he said.
Car loans are getting longer
Drivers are also taking out longer loans, which increases the total amount of money they are paying in interest in many cases.
The average vehicle loan term rose to 69.7 months for new vehicles during the third quarter, from 69.5 months during the third quarter of 2021.
The longest loan terms occurred on used vehicles, from 66.97 months in the third quarter of 2021 to 68.08 months during the third quarter.
Before consumers get a car loan, they should get copies of their credit report and make sure there are no errors that could “inadvertently torpedo your credit score,” McBride said.
It is recommended that you research your financing by comparing banks, credit unions and lenders online and add it up before you go car shopping.
“This not only sets limits around how much you can spend, but gives you the ability to negotiate the price of the car regardless of financing,” he said. “You’re not limited to the financing the dealer offers.”
.A growing number of consumers are getting auto loans from credit unions instead of going to banks, which have traditionally financed most auto loans.
Credit unions held 28.4% of auto loans during the third quarter, an increase of 40% year-over-year, compared to 20.2% during the third quarter of 2021.
The market share of car loans decreased for banks to 27.3% in the third quarter, from 32.5% in the third quarter of 2021.
New vehicle leasing fell to 18% in the third quarter from 27.3% in 2021.
Consumers are shifting to leasing larger vehicles, such as full-size trucks and SUVs, which comprise the top 10 most leased models.
Leased car payments tend to be lower than a down payment with the average difference between a loan and a lease payment at $133.
“Opting into a lease is one way consumers are looking to manage their monthly payments, which is often how they purchase a vehicle,” Zabritski said. “Affordability will remain a priority as a decline in leasing, coupled with a lack of new vehicle inventory, will affect the availability of used vehicles in a few years.”
The average auto loan credit score continued to rise to 738 from 733 year over year for new vehicle loans and to 678 for used vehicle loans, Experian said.
Wyoming has the highest percentage of used car loans at 85.4%, while New York reported the lowest amount at 65.5%.
New car loan payments are over $700
Auto loan payments topped the $700 level in July for the first time as consumers fueled their desire for new, larger vehicles as prices soared since the start of the global pandemic.
Smaller discounts from auto dealers along with rising car prices and loan interest rates have pushed monthly payments above $700, said Thomas King, president of data and analytics at JD Power, a data analysis based in Troy, Michigan.
“The average monthly financing payment in July is on track to hit an all-time high of $708, up $81 from July 2021,” he said.
