New cars are more available this spring, and manufacturers are starting to offer deals to entice buyers.
But at the same time, lenders have tightened the terms of car loans as they face a growing number of delinquencies. This has made it more difficult for some people to get financial loans.
Access to auto loans for both new and used cars was generally worse in January than in December and down year-over-year, according to Dealertrack, a Cox Automotive service that tracks credit availability based on factors such as loan approvals , the terms and the advances. The impact was seen in banks, credit unions and dealerships.
“We’re seeing access to credit tighten across all channels,” said Sean Tucker, senior editor at Kelley Blue Book, Cox’s auto sales and research website.
Subprime borrowers — consumers with the lowest credit scores — in particular may face challenges finding financing, Mr. Tucker said. The share of subprime loans for new cars fell to about 6 percent, about half of what it was before the pandemic.
Borrowers with strong credit are especially attractive to lenders. The average credit for new-car buyers taking out a loan or lease rose to 743 at the end of 2023, from 739 a year earlier, according to fourth-quarter data from Experian Automotive, which tracks auto financing. For used cars, the average score was 684, out of 681. (Experian’s report uses VantageScore 3.0 scores, which range from 300 to 850. Scores of 661 and above generally qualify for favorable terms.)
People are falling behind on auto loans (and credit cards) at higher interest rates than before the pandemic, according to the New York Federal Reserve’s February report on household debt and credit in the fourth quarter of 2023.
“This signals heightened financial stress, especially among younger and lower-income households,” Wilbert van der Klaauw, economic research adviser at the New York Fed, said in a statement about the findings.
Delinquency rates for all types of consumer debt fell in the depths of the pandemic in 2020 and 2021, the Fed report said, but are rising as stimulus savings wane and pauses in mortgage and student loan payments have ended.
Auto loans secured in 2022 and 2023 have so far had more problems than earlier loans, “perhaps because buyers in those years faced higher car prices and may have been forced to borrow more and at higher interest rates,” Fed researchers said. New York in post. Auto loan rates are affected by the Federal Reserve’s benchmark rate, which has been raised during the Fed’s campaign against high inflation.
While both car prices and average loan amounts have started to decline in the last year, monthly payments have not, in part because of higher interest rates on auto loans, according to Experian. The average monthly loan payment for a new vehicle at the end of last year was $738, up from $720 in 2022. The average for a used vehicle was $532, up slightly from $530.
The average interest rate on a new car loan was 7.18 percent at the end of 2023, up from 6.08 percent in 2022, Experian said.
Interest rates may affect advances. Heading towards 2020, a 10% down payment was typical. But it has risen to near 15% in recent months — likely because buyers are trying to lower their monthly payments, according to Cox Automotive.
With new car inventory plentiful, dealers have started offering incentives such as cashback rebates. Dealers typically like a 60-day supply of cars, but the average is now about 80 days, Mr. Tucker said. This means manufacturers can offer promotions to help get vehicles off the sales lot. “Supply is great,” he said, in contrast to the shortages that drove up prices during the pandemic.
Used-car buyers, however, may find that while prices have stabilized, “they’re still pretty high,” said Benjamin Preston, auto writer for Consumer Reports.
There’s an argument for waiting a bit if you don’t need to buy a car right away. Automakers that have emphasized more profitable, high-end models with luxury features during the pandemic are expected to begin ramping up production of more affordable cars in the coming months, Mr. Tucker said. And the Fed has signaled it may cut interest rates sometime this year, which could make loans more affordable.
Lower interest rates can be found now — if you have superior credit and can manage a shorter loan term, which means higher monthly payments, said Rod Griffin, senior director of public education and advocacy at Experian. (Longer-term loans — those spanning six to seven years — had an average interest rate of about 9 percent, Experian found.)
Honda recently offered 2.9 percent financing, with a 36-month term, on Honda CR-Vs. Subaru offered 1.9 percent with a 48-month loan on Outbacks.
Here are some car shopping questions and answers:
How do I prepare to shop for a car?
Prepare early, Mr. Griffin advised — at least six months before you plan to buy. Check your free credit report and ideally your credit score. (Before paying for a score, ask your credit card company or lender. Many provide them for free to their customers.) Take all the steps you can — like paying bills on time — to raise your profile.
Then shop for your loan and your car separately, Mr. Tucker said. Get pre-approved by your bank or credit union and take this offer with you to the dealer to see if they can beat it.
Is there a new rule governing car purchases?
Yes, but it has not yet come into effect. The Federal Trade Commission last year finalized the CARS rule, to combat retail auto fraud, aimed at protecting car buyers from hidden fees and bait-and-switch pricing tactics. The Commission said the rule would make it easier to shop based on a car’s true price and save buyers about $3.4 billion a year.
The rule was set to debut in late July, but the agency delayed it pending the outcome of a legal challenge by industry groups. “We continue to believe the rule is unnecessary, redundant, confusing and will unnecessarily lengthen the car sales process for consumers,” the National Automobile Dealers Association, one of the rule’s opponents, said in a statement.
What if I can’t afford to pay my car loan?
The Federal Trade Commission recommends that you contact your lender immediately. Some lenders may agree to work with you if you can keep making payments, even if they fall behind.
If you don’t pay, the lender can repossess your car. You may owe any difference between what your lender receives from the sale of the car and what you still owe on it, as well as fees associated with repossession. Additionally, getting the vehicle from a lender could make it harder and more expensive to get credit in the future. Know your rights, which vary by state. Contact your state attorney general’s office.
