Buying a used car remains expensive even as supply chain bottlenecks have eased, pushing the average loan amount to $28,506.
According to credit score company Experian, consumers still rely heavily on financing for their car purchases, and the average loan amount has increased by 8.59% year-over-year.
However, there are some glimmers of light.
“Since the start of the inventory shortage, used vehicle values have increased at a surprising rate, and appear to be slowing, which is a positive sign for consumers looking to buy a vehicle,” said Melinda Zabritsky, senior director of Automotive Financial Solutions. Experienced. “While average loan amounts and monthly payments continue to rise, there are many contributing factors such as rising interest rates.”
The amount consumers borrow to finance used cars is increasing at a slower rate. During the third quarter of 2021, Experian reported a year-over-year increase of 21.37%. This amount has increased by 8.6% in the third quarter of this year.
Used cars have seen their values rise as supply chain challenges from the global pandemic crimped semiconductor chip supply have reduced the number of new cars available.
Many drivers choose to buy used cars because of the lack of new inventory, but high demand has driven up prices.
The average loan amount for a new vehicle also saw a significant increase, rising from $37,753 in the third quarter of 2021 to $41,665 in the third quarter of 2022.
Used car loan interest rates over 9%
Interest rates for both used and new car loans continue to rise as the Federal Reserve raises interest rates in an effort to curb inflation.
Average interest rates during the third quarter were 5.16% for new vehicle loans and 9.34% for used ones, rising to 4.09% and 8.12% from 2021, according to data from Experian.
“Interest rates have risen this year for all borrowers — consumers, businesses and governments,” Greg McBride, chief financial analyst at Bankrate, a New York-based financial data company, told TheStreet.
“Used car rates are at an 11-year high, as are new car loan rates,” he said. “To put that in context, the Federal Reserve’s benchmark rate is the highest it’s been since 2008, so auto loan rates haven’t risen as fast.”
McBride said the reason interest rates are higher for used auto loans is because there is a higher risk of delinquency or default on a loan for an older vehicle.
“If the car breaks down, it’s less likely to be under warranty and if the vehicle is in a repair shop, the borrower may have difficulty getting to work or making payments,” he said.
Auto loans are getting longer
Drivers are also taking out longer loans, in many cases increasing the overall amount of money they pay in interest.
The average vehicle loan tenure for new vehicles increased to 69.7 months during the third quarter from 69.5 months during the third quarter in 2021.
Longer loan terms were seen in used vehicles, which increased to 68.08 months during the third quarter from 66.97 months in the third quarter 2021.
Before consumers get a car loan, they should get copies of their credit reports and make sure there are no errors that could “unwittingly torpedo your credit score,” McBride said.
Shop around for your financing, comparing banks, credit unions and online lenders, and line them up before you go car shopping, he recommends.
“This not only sets boundaries around the amount you can spend, but it gives you the ability to negotiate the price of the car without financing,” he said. “You’re not limited to whatever financing the dealer offers.”
A growing number of consumers are getting auto loans from credit unions instead of going to banks, which have traditionally provided the bulk of auto loan financing.
Credit unions owned 28.4% of vehicle loans during the third quarter, a 40% year-over-year increase compared to 20.2% during the third quarter in 2021.
The market share of auto loans for banks declined from 32.5% during the third quarter of 2021 to 27.3% in the third quarter.
Leasing of new vehicles 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.
Lease car payments are often lower than payments with the average difference between the loan and lease payments being $133.
“Choosing to lease is one way that consumers look to manage their monthly payments, which is often how they purchase a vehicle,” Zabritsky said. “Affordability will be top of mind as reduced leasing, coupled with a lack of new vehicle inventory, will affect the availability of used vehicles in a few years.”
The average credit score for auto loans increased year-over-year from 733 for new vehicle loans to 738 and 678 for used vehicle loans, Experian said.
Wyoming has the highest percentage of used car loans at 85.4%, while New York has the lowest at 65.5%.
New car loan payments exceed $700
Auto loan payments broke the $700 level for the first time in July as consumers fueled their desire for larger new vehicles as prices skyrocketed since the start of the global pandemic.
Thomas King, president of data and analytics at JD Power, a Troy, Michigan-based data analytics company, said rising car prices and low interest rates on loans have pushed monthly payments above the $700 level from auto dealers.
“The average monthly finance payment in July is on pace to reach a record high of $708, up $81 from July 2021,” he said.
