Despite taking out smaller auto loans, car buyers are committing to even higher monthly payments.
This is because it is more expensive to finance cars. According to a new report from Experian, rates on new auto loans rose to an average of 7.2% last quarter, up from 6.1% a year ago, while used rates jumped from 10.4% to ‘11.9%. If you have poor credit, meanwhile, you can expect much higher-than-average auto loan rates (see more below).
Car buyers are using a variety of strategies to adapt to an environment with painful loan rates and stubbornly high car prices. They appear to be taking out shorter loans to avoid paying more interest: The average loan length was 67.9 months in the fourth quarter, down from 69.3 a year ago. Even so, the average payment for a new car rose to $738 in the fourth quarter, up from $720 a year ago.
It’s natural to see buyers opting for shorter loan terms considering the high-rate environment, according to Melinda Zabritski, head of automotive financial insights at Experian.
The average amount financed in the fourth quarter was $40,366, which was approximately $1,143 less than a year ago. The decline in loan sizes may be due to the recent decline in auto prices due to improving inventories.
There was also an increase in cash sales, with all-cash purchases accounting for more than 20% of new vehicle transactions in the fourth quarter. “As we started to see rates rise, we definitely started to see more liquidity coming into the market,” Zabritski said in a presentation.
How Credit Scores Affect Loan Rates
For car buyers with poor credit and small down payments, the auto financing landscape is especially dangerous now.
The vast majority of car buyers financing new vehicles, nearly 82%, had credit scores of 660 or higher in the fourth quarter. If your score is lower, however, you won’t qualify for the best financing rates and your monthly payments will likely be much higher.
Here’s a breakdown of the average new car loan rate by credit score:
- Superprime (781-850): 5.64% APR.
- Prime (661-780): 7.01% APR
- Close to the first (601-660): 9.60% APR.
- Subprime mortgages (501-600): 12.28% APR.
- Deep subprime (300-500): 14.78% APR.
And here are the average loan rates by credit score for used vehicle financing:
- Superprime (781-850): 7.66% APR.
- Prime (661-780): 9.73% APR.
- Near the top (601-660): 14.12% APR
- Subprime mortgages (501-600): 18.89% APR.
- Deep subprime (300-500): 21.55% APR.
More from Money:
8 Best Car Loan Rates
Gas prices are on the rise again. Here because
The best overall car with the best value for money in 2024