That car purchase you’ve been mulling over might be more expensive than you anticipated. Car loan interest rates are the highest since 2009, Ronald Montoya of Edmunds writes. The average APR for new financed vehicles was 6.4% in March. For used cars, it was 9.5%.
“While these rising auto loan rates are a sign of a healthy economy, it also means that financing a car will be more expensive,” Montoya explained.
Why today’s interest rates seem so high
If 6.4% feels high, it’s because we’ve gotten used to new-car financing rates that hover around 4% in recent years.
Seasoned car owners may remember early 2000s-era rates of about 9%. But paying for a car with financing is also far more popular than it used to be; in 1999, 20% of Americans had a car loan, while 35% had one last year, Bloomberg reported.
How to work around high car loan interest rates
Now that we’ve grown accustomed to lower rates and once-plentiful 0% financing offers, the interest rate spike can be a confusing obstacle for car shoppers. Add those increasing interest rates to the fact that cars are getting more expensive, and that car loans are lasting as long as 96 months, and you end up looking at a pretty big financial burden for something that depreciates almost immediately.
If you have good credit, Montoya notes that low APR deals in the 2-3% range are still out there. Prime and super-prime borrowers—with credit scores of roughly 650 or higher— may not notice the increasing rates at all.
Meanwhile, if you have less-than-sparkling credit, don’t rush into the financing process. “If you have bad or ‘subprime’ credit — roughly, a FICO credit score of 501-600 — you could easily pay twice the average APR on a new vehicle loan,” Montoya warns.
Focus on a healthy credit score to improve your financing odds
Interest rates may remain steady this year, since the Federal Reserve isn’t planning to raise rates as much as last year, when it authorized four rate hikes. But since you can’t control the Fed, you have to stick with what you know: your credit score.
Shopping around for financing pre-approvals before you start test driving cars at the lot can help you prepare for the negotiating process. Instead of waltzing into the dealership and taking the interest rate they offer, go in armed with two or three rates from banks or credit unions. Even if you’re credit isn’t perfect, you’ll have a clearer picture of what interest rate you can expect.
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