High interest rates have pushed auto loan payments to record highs across the spectrum of borrowers, but those with poor credit can pay up to $12,000 more, a recent report by Jerry, a car compare-and-buy service, said.
Auto loans are the third-largest category of outstanding debt, after mortgages and student loans, according to the Federal Reserve. In recent years, vehicle costs have skyrocketed in sync with rising interest rates, leading to increased borrowing costs. Both new and used annual percentage rates (APR) reached levels not seen since the Great Recession, according to Edmunds data. New vehicle APRs hit 7.4% in the third quarter of 2023 and used-vehicle rates climbed to 11.2%.
Higher interest rates mean borrowers are on average spending roughly $736 a month on auto loans, according to Edmunds. Buyers with subprime and deep subprime credit ratings are paying two to three times higher interest rates on their auto loans than borrowers with prime and super prime credit ratings, according to the Jerry report. Nearly a third of Americans have a subprime credit score.
"Borrowers with poor credit ratings are paying more money on auto loans every month than those with good credit, posing a risk to their financial and economic prospects and the U.S. economy as serious delinquencies on car loans have hit a long-term high," Henry Hoenig, a data journalist at Jerry said. "The fact that those borrowers pay more than everybody else reflects the financial peril that people with less money and poor credit must face when a reliable car is an absolute requirement to participate in American economic life, especially during a growing crisis of affordability in car ownership."
One way to take control of car ownership costs is by making sure you are paying for the insurance you need. Shopping around for new auto insurance could help lower your costs. The Credible marketplace can help you compare multiple providers and find your personalized rate in minutes without affecting your credit score.
Getting a car loan is challenging
Auto loan payments that were past due 90 days or more hit 2.4% in the second quarter of 2023, the highest level in more than a decade, according to Jerry. These delinquencies were concentrated among people with subprime credit ratings. Despite this rise in missed payments, tighter credit lending requirements will likely help block a potential crisis.
Lenders have tightened credit out of concern that more people will default on loans. In June, the rejection rate for auto loans reached 14%, double the rate five years earlier and the highest in at least a decade, the Jerry report said. Moreover, the share of overall auto loans held by buyers with poor credit scores fell in recent years, to 17% in the second quarter of this year from 21% in 2018, as a result of tighter lending requirements after delinquencies and defaults began to surge before the COVID-19 outbreak.
"That tightening marked a reversal from the aftermath of the Great Recession, when lenders were eager to offer auto loans to just about anyone after default rates on auto loans during the financial crisis came in much lower than those on houses and credit cards," Hoenig said. "The banks were eager to lend because loans to people with subprime credit ratings are highly profitable."
Shopping for your auto loans is a time-tested way drivers can use to help reduce costs. If you are shopping around for new auto insurance, you can use the Credible marketplace to compare multiple providers and find your personalized rate in minutes.
Here's how you can lower your borrowing costs
Buying a car in the current market can be difficult, but these are steps you can take to reduce how much you will pay for your purchases:
Increase your down payment
Although low interest rate auto loans typically go to car shoppers with good or excellent credit, borrowers that don't fall into that category can still lower their rates by upping their down payment. Edmunds data said that the average down payment for used vehicles reached a record high in the third quarter of $4,111. A higher down payment helps minimize the risk the lender will assume by financing the car for you and reduces the interest you have to pay over the life of the loan. Increasing your down payment also reduces your monthly payment since you will finance less.
Read the fine print of your agreement
Some consumers pay for add-ons on products they don't need or want, like Guaranteed Asset Protection (GAP) insurance, paint protection, service contracts, and extended warranties. Ensure you pay for what you consented to and not for add-ons you haven't agreed to as part of your auto purchase agreement.
Check and Compare Interest Rates for Car Loans
Shopping for auto loans will help you find the best deal, regardless of your credit score. Comparing and checking interest rates and loan terms for auto loans offered by various lenders may also help you find the monthly amount you'll actually be paying.
If you want to lower your car ownership costs, you could save by shopping for cheaper auto insurance to reduce your monthly premiums. Visit Credible to speak with a car insurance expert and get your questions answered.
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