Rebecca Betterton | Bankrate.com (TNS)
When it comes to purchasing your next vehicle, the focus should be on finding your dream car rather than struggling with affordable financing. However, the car market has undergone significant changes since the early days of the pandemic. Inflation has made it challenging to find competitive rates, and supply chain issues have driven average car prices above MSRP.
Before searching for summer deals on new wheels, it’s essential to consider how the state of the economy will impact your price.
Economic Outlook Makes Lenders Cautious
Obtaining vehicle financing is currently a challenge for borrowers due to one primary issue.
“It’s harder to get a car loan now because it’s hard to get a car,” says Satyan Merchant, SVP and Head of TransUnion’s Auto Finance Business.
The current state of the economy has shifted the lending environment, making it challenging to purchase a vehicle even for those who have found their perfect set of wheels.
Lenders have tightened their standards, resulting in a decrease in vehicle loan originations. Higher rates have also made it difficult to afford even inexpensive vehicles.
Decrease in Vehicle Originations
With vehicle prices remaining above average compared to pre-pandemic years and interest rates still rising, it’s no surprise that buyers are cautious.
According to TransUnion data, the third quarter of 2022 closed with 6.6 million originations, down from 7.3 million in the same quarter of 2021. Interestingly, subprime borrowers, who usually receive the worst rates, experienced the smallest decrease in originations compared to other credit bands.
This discrepancy can be explained by the fact that subprime borrowers often face more complex financial situations than prime borrowers. Many borrowers in the subprime category still need financing to afford a vehicle, even if it means accepting less-than-ideal rates.
Tightening Lender Standards
Banks, credit unions, and online lenders operate in the same economic environment as borrowers. Just like many Americans are tightening their budgets, lenders must also adjust their spending and lending habits in response to the increased cost of lending.
The Dealertrack Credit Availability Index, a measure of access to credit by Cox Automotive, tightened in the month of May. Availability reached its lowest point since February 2021, making it currently more difficult to obtain auto financing than in the past two years.
The report noted that auto loan approval rates have decreased by 2.4 percentage points year over year, leading to more lenders declining loan applications.
Cox Automotive observed an increase in borrowers choosing longer loan terms and fewer borrowers making large down payments.
Although opting for long loan terms can result in lower monthly payments, experts advise against extended loan terms. They can end up costing you more over the lifetime of the loan and keep you stuck with the same vehicle for a longer period.
Making a substantial down payment is a wise move as it reduces your monthly costs.
Negation of Cheaper Cars by High Rates
In March, there was finally a month-over-month decline in the average new-vehicle transaction price. According to Kelley Blue Book, the average cost of new vehicles for buyers was $48,008. Although still high, this number is below MSRP for the first time in 20 months. In May, prices slightly increased but remained below sticker price, averaging $48,528.
However, while car prices stabilize, the cost to finance these vehicles is increasing. Satyan Merchant compares the influencing factors on monthly payments to ingredients mixing in a cauldron. The monthly payment depends on the amount financed, the terms agreed upon, and the interest rate received.
“When you mix it all up,” he says, “the average monthly payment on both new and used vehicles continues to rise.”
He explains that even if there’s some relief in one of these factors, other factors may work against each other.
Many buyers are realizing that while the cost of the vehicle may have eased, the interest rate has gone up. This makes finding a good deal, especially for borrowers with poor credit, a challenge. Rates are not expected to drop soon, so this challenge is likely to persist for the next year.
How to Secure Vehicle Financing Despite High Rates
Increased vehicle interest rates will be a reality, at least for the next year. If you plan to buy a new vehicle before the new year, consider the following tips to secure the best auto loan:
- Shop around: Compare at least three different lenders to find the best financing option. Pay attention to fees, terms, and rates for your credit score.
- Apply for loan prequalification: Get a clear idea of your expected monthly payments through prequalification to ensure affordability.
- Add a co-signer: If your credit is weak and affordable rates are out of reach, adding a co-signer with strong credit can significantly improve your rates.
- Calculate the true cost of ownership: Consider the overall cost of owning and operating the vehicle before agreeing to a monthly cost.
Next Steps
Getting your dream car to the dealership lot and eventually to your driveway involves many moving parts working together. With inflation adding friction to the system, be prepared to spend a bit more money on financing. Lenders are hesitant to provide funding for borrowers, so those with strong credit are more likely to find competitive rates.
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