Despite car incentives, high interest rates weaken deals for buyers

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Incentives are returning to the auto market, but high interest rates are weakening deals for car buyers.

“Pre-pandemic, people saw 0% financing for 60 months and thought 'no problem' because it was available everywhere,” says Jessica Caldwell, an insights analyst at Edmunds, an auto research site.

In today's market, consumers are more likely to see it as “free money,” she said, especially as interest rates on auto loans remain high.

The average annual interest rate on a new car loan was 7.1% in the first quarter of 2024, which is the fifth straight month of rates above 7%, according to Edmunds.

The APR for used car loans rose 11.7% over the same period, an increase of one-tenth of a percentage point from the previous quarter.

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Despite the high borrowing costs, car buyers can still take advantage of reintroduced financing offers and other incentives such as rebates and dealer cash. But shoppers will have to do more research than in that earlier era to find those deals, experts say.

“Consumers can find good deals, but you have to go one model at a time,” says Brian Moody, editor-in-chief at Kelley Blue Book.

Be careful with longer loan terms

Financing offers depend in part on the term of the loan. You may receive a better interest rate with a short term, and a lower monthly payment with a long term.

While extending the loan term can help lower monthly costs, you run the risk of owing more than what the car is worth, which can cause more financial problems down the road, experts say.

“The negative equity situation is real,” Edmunds' Caldwell said.

Customers need to be realistic about how long they plan to keep the car, Caldwell explains.

If you're someone who buys a new car every three to four years, you may find yourself in a situation where you trade in your car and it's worth less than you owe, she said.

The share of new car purchases in that situation — known as a negative equity trade-in — rose to 23.1% in the first quarter, according to Edmunds. That's an increase from 18.3% from a year ago and 14.7% in the first quarter of 2022.

The average amount of negative equity rose to a record high of $6,167 in the first quarter, researchers found.

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When you include that in your new car loan, it increases your payment.

According to Edmunds, the average monthly payment for new car buyers who traded in underwater loans was $887 in the first quarter. The average APR was 8.1% for a term of 75.8 months.

When comparing financing options, instead of just focusing on lowering the monthly payment, calculate the total interest you'll pay, experts say.

“That's what you need to be aware of,” Caldwell said. “Longer loan terms will always look more attractive because they are more affordable, but that's really only part of the story.”

According to Moody, “The faster you pay it off, the less interest you pay.”

What to do before going to the car dealer

1. Search for available incentives: Car buyers will have to do a lot more shopping and research to find available incentives, Caldwell said.

“There are deals creeping around,” she said. “There was a point two years ago where there were just no more deals.”

Look for models that aren't in high demand, as automakers and dealers rarely encourage popular models, Moody said.

'There may be cashback or low financing for one type of Ford, but yes [another] type, there's nothing there,” said Moody. “It makes it more challenging for consumers because you really have to do your research.”

2. Know your credit score: Although shoppers will come across 0% financing offers, these deals are often reserved for buyers with excellent credit. Find out what your latest score is to avoid getting stuck in deals you don't fully understand, Moody explains.

3. Get Pre-Qualified for Several Loans: Shop around for car loans at different banks or credit unions before heading to the dealer, experts say.

That can help you determine what interest rate you can get and compare offers, Moody said.

Don't limit yourself to comparing monthly payments. Consider the amount of interest you'll pay over the life of the loan, Caldwell said.

If you have these options, you can also negotiate with dealers.

“Always give the dealer a chance to beat that deal on interest rates and loan terms, and often you can,” Moody said. “If they can't do that, you already have this loan.”

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