Buying a used car remains expensive even though supply chain bottlenecks have eased, bringing the average loan size to $28,506.
Consumers still rely heavily on financing for car purchases, and the average loan size rose 8.59% year-on-year, according to credit rating firm Experian.
There are still some glimmers.
“Since the beginning of the inventory shortage, the value of used vehicles has increased at an astonishing rate, and it seems to be slowing down, which is a positive sign for consumers looking to buy a vehicle,” said Melinda Zabritski. , Senior Director of Automotive Financial Solutions at Expérian. “As average loan amounts and monthly payments continue to grow, many factors are contributing, such as rising interest rates.”
The amount consumers borrow to finance a used car is growing at a slower rate. During the third quarter of 2021, Experian recorded a year-over-year increase of 21.37%. In the third quarter of this year, the amount increased by 8.6%.
Used cars have seen their value skyrocket as the number of new cars available has plummeted due to the global pandemic-related supply chain challenges that crimped semiconductor chips provide.
The lack of new inventory has caused many drivers to choose to buy used cars, but high demand has driven prices up.
The average loan amount for a new vehicle also saw a significant increase, rising to $41,665 in the third quarter of 2022 from $37,753 in the third quarter of 2021.
Used car loan interest rates exceed 9%
Interest rates for used and new car loans continue to rise due to the Federal Reserve raising interest rates in an effort to curb inflation.
The average interest rate during the third quarter was 5.16% for new vehicle loans and 9.34% for used vehicles, compared to 4.09% and 8.12% compared to 2021 , according to data from Experian.
“Interest rates have climbed for all borrowers this year – consumers, businesses and governments,” Greg McBride, chief financial analyst for Bankrate, a New York-based financial data firm, told TheStreet.
“Used car rates are at an 11-year high, as are new car loan rates,” he said. “To put that into context, the Federal Reserve’s benchmark rate is the highest since 2008, so auto loan rates haven’t risen as quickly.”
The reason interest rates are higher for used car loans is that there’s a greater risk of delinquency or default on a loan for an older vehicle, McBride said.
“If the car breaks down, it’s less likely to be under warranty, and if the vehicle is in the repair shop, the borrower may have trouble getting to work or keeping up with payments,” a- he declared.
Auto loans are getting longer
Drivers are also taking longer loans, increasing the overall amount of interest they pay in many cases.
The average term of auto loans increased to 69.7 months for new vehicles in the third quarter from 69.5 months in the third quarter of 2021.
The longer loan terms occurred in used vehicles, increasing to 68.08 months in the third quarter from 66.97 months in the third quarter of 2021.
Before consumers get a car loan, they should get copies of their credit report and make sure there are no errors that could “inadvertently torpedo your credit score,” he said. McBride.
Shop around for your financing, compare banks, credit unions and online lenders and get it lined up before you go car shopping, he recommends.
“Not only does it set limits around how much you can spend, but it gives you the ability to negotiate the price of the car regardless of financing,” he said. “You are not limited to financing offered by the dealership.”
.A growing number of consumers are getting auto loans from credit unions instead of banks, which traditionally funded most auto loans.
Credit unions held 28.4% of auto loans in the third quarter, up 40% year-over-year from 20.2% in the third quarter of 2021.
Auto loan market share declined for banks to 27.3% in the third quarter from 32.5% in the third quarter of 2021.
New vehicle leasing fell to 18% in the third quarter from 27.3% in 2021.
Consumers are shifting to renting larger vehicles, such as full-size trucks and SUVs, which are among the top 10 most rented models.
Payments for leased cars are often less than a payment with the average difference between a loan and a lease payment at $133.
“Leasing is a way for consumers to manage their monthly payments, which is often how they purchase a vehicle,” Zabritski said. “Affordability will remain a priority, as a decline in leasing, coupled with a lack of new vehicle inventory, will impact the availability of used vehicles in a few years.”
The average credit score for auto loans continued to rise to 738, from 733 year-over-year for new-vehicle loans and 678 for used-vehicle loans, Experian said.
Wyoming has the highest percentage of used car loans at 85.4%, while New York reported the lowest at 65.5%.
New car loan payments exceed $700
Auto loan payments broke through the $700 level for the first time in July as consumers fueled their desire for larger new vehicles as prices soared since the start of the global pandemic.
Smaller discounts from car dealerships along with higher car prices and interest rates for loans pushed monthly payments above the $700 level, said Thomas King, president of the data division and of analytics at JD Power, a data analytics company based in Troy, Michigan.
“The average monthly finance payment in July is on track for a record high of $708, up $81 from July 2021,” he said.
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