More car buyers pay at least $1,000 a month for their loans as high prices, rate hikes throw ‘a one-two punch’

A growing share of car buyers are signing up for monthly loan payments of $1,000 or more amid rising interest rates and elevated auto prices, new research shows.

Overall, 14.3% of consumers who financed a new vehicle in the third quarter committed to payments at or above that amount, up from 8.3% during the year-earlier period, according to Edmunds. For buyers of electric vehicles, that share is 26%; for hybrids, 24%.

“High prices and rising interest rates are dealing consumers a one-two punch by catapulting monthly payments into a new realm,” said Jessica Caldwell, Edmunds’ executive director of insights.

The interest rate on new car loans has reached 5.7%, up from 4.3% a year ago, Edmunds data shows. And with the Federal Reserve expected to continue raising interest rates to battle persisting inflation, auto loan rates could tick even higher.

The average price paid for a new car in the third quarter was $45,971, according to an estimate from J.D. Power and LMC Automotive. While there are signs the market is cooling, that sticker price is 10.3% higher than the same period in 2021.

What’s more, sales incentives from manufacturers, which typically bring down the total price, were minimal. In September, the average discount was about $936, down 47.8% from a year earlier, the J.D. Power/LMC estimate shows.

“The lack of inventory, coupled with strong demand, continues to allow manufacturers to maintain a low level of discounting,” said Thomas King, president of the data and analytics division at J.D. Power.

More from Personal Finance:
46% of consumers make this credit card mistake
High inflation is hitting holiday travel plans
Americans are suffering from ‘recession fatigue’

Ongoing inventory shortages are also partly to blame for elevated prices, as are changing consumer preferences.

“We’ve seen Americans embrace a bigger-is-better mindset by gravitating toward larger vehicles,” Caldwell said, adding these autos also come with costly creature comforts and advanced technologies.

If you can, take advantage of the value of trading in your used vehicle.

The increase in monthly payments would be larger if not for the higher trade-in values on buyers’ used cars, King said. The average trade-in value for September was an estimated $9,617, up 21.7% from a year ago.

While used car prices are softening, they remain 33% — or $8,810 — higher than where they would be if typical depreciation had occurred over the past two years, according to CoPilot, a car-shopping app.

For buyers, although there may be less negotiating room amid ongoing inventory challenges, another way to keep your payment down is to get the best interest rate possible by having a good credit score.

While it’s hard to know which credit score will be used by a lender (they have options), having a general goal of avoiding dings on your credit report helps your score regardless of the company it uses, experts say.

“Some of the easiest ways to boost your credit score include checking your credit report for errors and keeping your open accounts in good standing — the latter means that you need to pay all your credit bills on time and in full each month,” said Jill Gonzalez, an analyst and spokesperson for personal finance website WalletHub.

“You can also improve your score by keeping unused accounts open, as this helps build a long credit history, which is essential for a good credit score,” she said.