The average loan amount and monthly payments are at record high numbers.

Is this a good year to finance a new car? No. Financing a new car in 2018 costs more than it has in the past nine years.

The typical new car loan is $31,455, says a study from credit bureau Experian. That’s up $921 from last year. And interest rates on auto loans are at a nine-year record high, according to Edmunds, a car-shopping website.

Oddly as prices climb, more people are buying new cars. But the rate in which costs are rising may slow sales down.

“Higher interest rates appear to be incentivizing car shoppers, which is likely why we’ve seen stronger than expected sales so far this year,” says Edmunds executive Jeremy Acevedo. “Since interest rates have been creeping up all year, shoppers are likely thinking it’s better to buy now before rates get any higher. However, this is likely a temporary pull-ahead effect, and could come back to bite automakers later in the year.”

Why are costs rising?

Car makers are offering less zero-percent car loans, which in turn is contributing to the rise in annual percentage rates on car loans.

Historically, car makers have offered car loans without a fee for borrowing to entice buyers. When you borrow a loan from a bank, you aren’t typically lent money for free. Banks charge interest on loans as a fee on the money they lend you. Banks don’t offer zero percent loans, though, the car makers do, according to Autotrader.

Car makers offer zero percent interest loans, because they still get paid what the car is worth, (just over a longer span of time.) It can work out to be the same as a cash buyer — just not upfront, Autotrader reports. However, most borrowers don’t actually qualify for zero percent loans. Car makers tend to offer zero percent interest auto loans to borrowers with the highest credit scores and longest credit histories. But less car makers can afford to offer zero percent interest loans now.

This May, zero percent loans hit their lowest levels in seven years, according to Edmunds. This year, zero percent loans made up 6.3 percent of all finance deals, compared to 9.9 percent last May, and 9.8 percent in 2013.

“Zero-percent financing loans are growing too costly for automakers to offer, but that doesn’t mean that incentives are not out there,” Acevedo says. “Automakers and dealers are simply turning toward other, more creative incentive structures in order to lure in consumers.”

Car buyers could always purchased used vehicles — but even those types of cars are selling at record high prices this year.

Used car prices are up, too

The average used car is selling for $19,657 this year, another Edmunds report finds. That price is up 2.2 percent from last year, and 17.6 percent increase from 2013. Edmunds is attributing this rise to an increase in near-new car supply from vehicles that were leased before. There has also been a shift in what types of car buyers want, ranging from different sizes, ages and higher gas mileage.

“Used-car shoppers are typically more price-sensitive to changes in the market, but this is the first time in years that we’re seeing renewed demand for smaller vehicles,” says Edmunds executive Ivan Drury. “With rising fuel costs breathing fresh air into this segment, subcompact and compact cars are finally retaining value again.”

Gas prices hit a four-year high this year, which has prompted more buyers to trade in their SUVs and trucks for smaller, compact cars. These changes have disrupted the used car market, and subsequently driven used car prices upward.

“For the last few years, car-based products reigned as the dominant vehicle type in the off-lease market, which was unfortunate timing for those lease returns given that low fuel costs shifted consumer preference from cars to SUVs and trucks,” Drury says. “As we enter the timeframe for SUVs and trucks to take over a larger share of lease returns, fuel costs are showing signs of rising and disrupting a market that has been stable for years.”

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Joe Pye

Joe Pye

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Pye is the associate editor of Debt.com.

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auto loans, car buying

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Article last modified on July 13, 2018 Published by Debt.com, LLC . Mobile users may also access the AMP Version: 2018 Is a Bad Year to Finance a New Car - AMP.