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Car Buyers Are Taking out Smaller Loans, but Monthly Payments Are Still Higher
By Pete Grieve MONEY RESEARCH COLLECTIVE
Your credit score can have a huge impact on the size of your car payment.
Despite taking out smaller auto loans, car buyers are committing to even higher monthly payments.
That’s because it’s more expensive to finance cars. New auto loan rates climbed to an average of 7.2% last quarter, up from 6.1% a year ago, while used rates jumped from 10.4% to 11.9%, according to a new Experian report. If you have poor credit, meanwhile, you can expect car loan rates that are much higher than average (see more on this below).
Car buyers are using a variety of strategies to adapt to an environment with painful loan rates and stubbornly expensive auto prices. They appear to be taking out shorter loans to avoid paying more interest: The average loan term was 67.9 months in the fourth quarter, down from 69.3 a year ago. Even so, the average new car payment rose to $738 in the fourth quarter, up from $720 a year ago.
It’s natural to see buyers opt for shorter loan terms considering the high rate environment, according to Melinda Zabritski, head of automotive financial insights at Experian.
The average amount financed in the fourth quarter was $40,366, which is about $1,143 less than a year ago. The drop in loan sizes could be due to the recent dip in car prices as inventory has improved.
There’s also been an increase in cash sales, with all-cash purchases making up more than 20% of new vehicle transactions in the fourth quarter. “As we started to see those rates increase, we certainly started to see more cash come into the market,” Zabritski said in a presentation.
How credit scores affect loan rates
For car buyers with poor credit and small down payments, the auto financing landscape is especially perilous now.
A large majority of car buyers financing new vehicles, nearly 82%, had credit scores of 660 or above in the fourth quarter. If your score is lower, however, you won’t qualify for the best financing rates and your monthly payments will likely be much higher.
Here’s a breakdown of the average new car loan rate by credit score:
- Super prime (781-850): 5.64% APR
- Prime (661-780): 7.01% APR
- Near prime (601-660): 9.60% APR
- Subprime (501-600): 12.28% APR
- Deep subprime (300-500): 14.78% APR
And here are average loan rates by credit score for used vehicle financing:
- Super prime (781-850): 7.66% APR
- Prime (661-780): 9.73% APR
- Near prime (601-660): 14.12% APR
- Subprime (501-600): 18.89% APR
- Deep subprime (300-500): 21.55% APR
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Pete Grieve is a New York-based reporter who covers personal finance news. At Money, Pete covers trending stories that affect Americans’ wallets on topics including car buying, insurance, housing, credit cards, retirement and taxes. He studied political science and photography at the University of Chicago, where he was editor-in-chief of The Chicago Maroon. Pete began his career as a professional journalist in 2019. Prior to joining Money, he was a health reporter for Spectrum News in Ohio, where he wrote digital stories and appeared on TV to provide coverage to a statewide audience. He has also written for the San Francisco Chronicle, the Chicago Sun-Times and CNN Politics. Pete received extensive journalism training through Report for America, a nonprofit organization that places reporters in newsrooms to cover underreported issues and communities, and he attended the annual Investigative Reporters and Editors conference in 2021. Pete has discussed his reporting in interviews with outlets including the Columbia Journalism Review and WBEZ (Chicago's NPR station). He’s been a panelist at the Chicago Headline Club’s FOIA Fest and he received the Institute on Political Journalism’s $2,500 Award for Excellence in Collegiate Reporting in 2017. An essay he wrote for Grey City magazine was published in a 2020 book, Remembering J. Z. Smith: A Career and its Consequence.