By Bob Child, COO, Origence Used car prices dropped 8.8% from January to December 2022 — the biggest dropoff since the end of the Great Recession in June 2009. But it’s not all good news for car buyers, because sticker price isn’t the only factor to consider when evaluating a vehicle’s affordability. Interest rates have a […]
By Bob Child, COO, Origence
Used car prices dropped 8.8% from January to December 2022 — the biggest dropoff since the end of the Great Recession in June 2009. But it’s not all good news for car buyers, because sticker price isn’t the only factor to consider when evaluating a vehicle’s affordability.
Interest rates have a significant impact on the cost of a new or used vehicle — and interest rates have increased more than 2% from January 2022 to 2023 thanks to the Federal Reserve’s strategy to tamp down inflation. Although a 2% increase may seem minor, it translates to a real-dollar difference in auto loan payments. For instance, a 7% interest rate on a $40,000 car means a borrower will pay an additional $2,232 over the life of a 5-year loan compared to the same vehicle with a 5% interest rate.
Sometimes shopping for a car isn’t an investment people can delay until economic conditions improve. But by evaluating their financial picture and shopping around for the best rates, it’s still possible for consumers to secure auto loans with favorable terms.
And more often than not, it means getting pre-approved for a loan before even setting foot on a car lot.
Auto loan challenges and misconceptions
When it comes to consumers’ biggest financial stressors, auto loans ranked third, behind mortgages and personal loans. That’s understandable given the myriad challenges and misconceptions car buyers face when searching for an auto loan. Common misconceptions include:
Misconception #1: The car dealership finance office will get them the best available loan rate
Misconception #2: The interest rate is the only number lenders pay attention to
Misconception #3: Large banks are the safest lender option
Buyers with nonexistent credit histories or low credit scores typically struggle to find a lender and competitive interest rate. But regardless of credit history, many buyers are unaware of the options available to them. Too often, this results in a buyer falling in love with a vehicle and accepting the first interest rate that’s offered to them at the dealership. These shoppers tell themselves they’ll refinance the loan later, but they rarely follow through.
Buyers who fail to research their options are more likely to end up with loan terms that can negatively impact their overall financial health. They may also miss out on loans that provide opportunities to improve their credit score.
The bottom line? Auto buyers can’t afford to rush the selection of a lender — there’s simply too much at stake.
4 questions for car buyers to assess their auto loan needs
Securing a loan with favorable terms remains achievable in today’s economic environment — but it requires borrowers to do some planning before visiting a dealership.
To gain a better understanding of their auto needs, car buyers should ask the following four questions:
What does their budget look like? With average monthly payments for new cars reaching nearly $700 — a 13% increase from the previous year — consumers need to avoid biting off more than they can chew. Experts recommend limiting monthly car-related expenses to around 15% of a person’s take-home pay. There are also tools available to help shoppers determine their budget.
Could they switch to electric vehicles (EVs)? While EVs are more expensive upfront, they typically have lower maintenance costs and eliminate the need to worry about fluctuating fuel prices. Additionally, EV buyers within specific income parameters may be eligible for a tax credit. If the vehicle meets the government’s critical mineral and battery component requirements, buyers can receive a tax credit of up to $7,500 — which can go a long way toward the car’s purchase price or monthly payments.
Have they considered every factor of their loan terms? If borrowers place too much emphasis on the interest rate, they may end up paying more than they anticipated for a longer term than they wanted to. This is why it’s crucial for consumers to carefully weigh all loan terms, including monthly payment, interest rate and the duration of the loan. Borrowers should also consider the fact that credit unions typically offer lower interest rates than banks because their shareholders are members of the institution.
Is preapproval an option? Even though many people believe they can secure the best loan rates through car dealerships, this often isn’t the case. Car dealers sometimes provide borrowers with only a few offers from the lenders they work with. To guarantee the best loan, people need to shop interest rates and lenders before heading to a dealership. When buyers find a good loan, it’s important to ask if they can get a preapproval in writing — an option many local credit unions offer. Preapprovals make for a smooth purchasing process and empower shoppers to focus their attention on negotiating the best price for their vehicle.
Inflation continues to present barriers to vehicle purchases, especially for nontraditional buyers and buyers with low credit scores. In any case, it’s important for borrowers to remain patient and avoid going with the first lender they encounter. With knowledge of the loan process, an understanding of their needs and credit unions on their side, finding a favorable auto loan is within reach — and it doesn’t have to cause headaches.
