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Incentives are coming back in the car market, but high interest rates are cutting into the deals for car shoppers.
“Before the pandemic, people would see 0% financing for 60 months and think ‘no big deal,'” said Jessica Caldwell, insights analyst at auto research site Edmunds. Everywhere.
In today’s market, consumers are more likely to view it as “free money,” she said, especially with auto loan interest rates remaining high.
Edmunds said the average annual interest rate on new car loans in the first quarter of 2024 was 7.1%, marking the fifth consecutive month that rates exceeded 7%.
During the same period, the annual interest rate of second-hand car loans increased by 11.7%, an increase of one-tenth of a percentage point from the previous quarter.
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Despite higher borrowing costs, car buyers can still get some benefits from relaunched financing offers and other incentives like discounts and dealer cash. But experts say shoppers will have to do more research than before to find these deals.
“Consumers can find good deals, but you have to choose model by model,” said Brian Moody, executive editor of Kelley Blue Book.
Choose a longer loan term carefully
Financing offers depend in part on the term of the loan. You may get a better interest rate in the short term, but lower monthly payments in the long term.
While extending the term of your loan can help lower monthly costs, you could owe more than the car is worth, which could cause more financial problems down the road, experts say.
“The negative equity situation is real,” Edmonds’ Caldwell said.
Caldwell explains that shoppers have to be realistic about how long they plan to keep the car.
If you buy a new car every three to four years, you may end up in a situation where the vehicle is worth less than what you owe on it when you trade it in, she said.
Edmunds said the share of new cars purchased under such circumstances, known as negative-equity trade-ins, rose to 23.1% in the first quarter. This is up from 18.3% a year ago and 14.7% in the first quarter of 2022.
Researchers found that the average amount of negative equity jumped to a record high of $6,167 in the first quarter.
When you roll that into a new car loan, your payments increase.
Edmunds said the average monthly payment for new car buyers who took out underwater loan deals in the first quarter was $887. The term is 75.8 months and the average annual interest rate is 8.1%.
When you’re comparing financing options, don’t just focus on lowering your monthly payments, experts say, but be sure to calculate the total interest you’ll pay.
“That’s what you have to realize,” Caldwell said. “Longer loan terms always look more attractive because they are cheaper, but that’s really only part of the story.”
“The sooner you pay it off, the less you’ll pay in interest,” Moody’s says.
What to do before going to a car dealer
1. Look for available incentives: Caldwell said car buyers must do more shopping and research to find available incentives.
“There are some deals happening quietly there,” she said. “There was a period two years ago when there was no deal at all; there was no deal to talk about.”
Moody’s said look for models that are not in high demand because automakers and dealers “rarely incentivize popular” models.
“One type of Ford may have cash back or low financing, but (another) type does not,” Moody’s said. “That’s more challenging for consumers because you really have to do the research. ”
2. Know your credit score: While shoppers may encounter 0% financing offers, these deals are generally reserved for buyers with good credit. Know what your latest score is to avoid getting stuck in a deal you don’t fully understand, Moody’s explains.
3. Get pre-qualified for different loans: Experts say before heading to the dealership, shop around at different banks or credit unions for a car loan.
Moody’s says this allows you to determine what rates you can get and compare offers.
Don’t limit yourself to comparing monthly payments. Consider the amount of interest you’ll pay over the life of the loan, Caldwell says.
Having these options will also help you negotiate with the dealer.
“Always give the dealer a chance to beat the deal on interest rates and loan terms, and usually they can,” Moody’s said. “If they can’t, you’ve got the loan.”
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