Auto experts recommend buying used or leasing new.
A new vehicle will cost you $6,500 more than it did five years ago.
The annual percentage rate on car loans has risen from 4.4 percent to 5.7 percent since 2013, says a study from car-shopping website Edmunds.
On top of high auto loan interest rates, the average amount financed today is $31,020, up from $26,533 in 2013.
“The rise in interest rates impacts car shoppers across all credit tiers,” says an Edmunds editor Matt Jones. “Consumers will need to adjust their expectations on what they can now afford because they may not qualify for the same interest loan rates they did five years ago.”
Adjust their expectations how?
Car buying possibilities
Leasing or buying used are still options. Some disagree with leasing, though.
A new car isn’t for everyone. Some buyers don’t have good credit, and others don’t want a loan, period.
In fact, some financial experts disagree with buying a new car. It’s an investment that will only lose value over time. The amount a buyer needs to pay in interest adds up — and its not a cost of the car — just costs towards the loan.
Debt.com has previously reported tips to car buying, and the first one was, “buy used.” Of course, all those recommendations are for shoppers who would buy a used car with cash. Edmunds recommends to those with poor credit to finance a used car.
The car-shopping website’s study does point out that historically used-car interest rates were higher than new-car rates. However, they “remained relatively stable over the past five years,” the study says.
There are car brands offering zero-percent interest rates, but they are tougher to come across. Car shoppers will need to keep an open mind towards makes and models to find one with lower interest rates, the study says.
And for those who have better credit?
Car shoppers with good credit may also be more interested in leasing this year than previously, the study says.
“Interest rate hikes do affect leasing, but since the total lease amount is a fraction of a new car’s sale price, you will still pay less every month,” the study says. “Edmunds leasing advice remains the same, regardless of interest rates: Look for lease specials, keep the down payment low and be mindful of the mileage limits.”
Leasing rates are up, but is it a good idea?
Financial experts would disagree with leasing, even though more car shoppers have been doing it.
Last August, Debt.com’s chairman, and CEO Howard Dvorkin responded to a reader’s question about leasing a car. Dvorkin said that leasing rates had just taken a dive from skyrocketing levels.
In 2016, the amount of new cars leased was at a record high of 31.9 percent, which fell to 31.1 percent in 2017. That rate has since risen to a new record-high number of 33.5 percent this February, according to a previous study from Edmunds. An Edmunds executive Jessica Caldwell attributed this as a response to the rising interest rates and monthly payments on new vehicles.
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“As average transaction prices and interest rates rise, we’re likely going to see more consumers explore the option of leasing,” Caldwell says. “In some cases, this is a result of consumers simply seeking a way to cut down monthly payments, but for many others, this the only option available when they discover that they can no longer afford the costs of a new vehicle.”
Dvorkin doesn’t disagree with leasing entirely but believes its only worthwhile in certain circumstances. If the driver needs to commute long distances for work or has pets, steer clear of the option.
Some leasing agreements say the lessee will be penalized for exceeding a limited mileage amount. There may be a clause on damages to the vehicle, too. Jones recommends car shoppers to take their time, and consider all options while looking for a car while APR on auto loans are this high.
“While interest rates are rising, this doesn’t necessarily mean that you have to buy a car right now,” Jones says. “The best time to buy a car is when you need one and only after you have completed your research.”
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Article last modified on May 30, 2018. Published by Debt.com, LLC . Mobile users may also access the AMP Version: New Car Loans Hit Record High This Year - AMP.