Car loan terms have shortened, but monthly payments have risen. (iStock)
Higher interest rates have dimmed the appeal of longer-term loans even for borrowers with good credit, according to a recent Experian report.
Instead, they pay more monthly for a shorter term in exchange for a better interest rate, according to Melinda Zabritski, Experian’s head of automotive financial insights. The Federal Reserve has raised interest rates 11 times since 2022 to bring soaring inflation down to a 2% target rate. That has translated into higher borrowing costs for everything from car loans to mortgages.
Loans of 48 months or less had the lowest new-vehicle financing costs for the fourth quarter of 2023 and these loans correlate with higher credit scores, according to Experian’s report. Conversely, loans that stretch 84 months — or even longer — paid the highest interest rates.
“With interest rates remaining at elevated levels, it’s natural to see consumers continue to opt for shorter-term loans,” Zabritski said in a statement. “While consumers may spend more on their monthly payment, the overall cost of a vehicle is much lower. As the market continues to change, lenders and dealers need to watch the trends carefully to properly assist in-market shoppers.”
If you’re trying to lower your overall auto costs, you could consider switching auto insurance providers. You can visit Credible to compare quotes from different companies without affecting your credit score.
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Negative equity adds to affordability challenges
Higher borrowing rates continued to push the share of new-car shoppers paying $1,000 or more above 17% for the fourth straight quarter, according to a recent Edmunds report.
Moreover, buyers locked into these high monthly payments face a growing risk of negative equity. Negative equity or being underwater on a car loan means that what a borrower owes on financing exceeds the vehicle’s value. The average negative equity on vehicle trade-ins rose to a record high of $6,167 in the first quarter of 2024.
“The resurgence of negative equity is only compounding the affordability challenges, as consumers who regretted their pandemic-induced purchases are now encountering lower-than-expected vehicle values when returning to dealerships for a new purchase,” Edmunds head of insights Jessica Caldwell said.
If you are looking to save money on your car costs, you could consider changing your auto insurance provider to get a lower monthly rate. You can visit Credible to shop around and find your personalized premium without affecting your credit score.
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Drivers paying high insurance costs
Drivers paid an average of $1,841 to insure a car in 2023, or 5% more than they did the previous year, according to a recent report from the Zebra. That comes after a 15% jump between 2022 and 2023.
The same factors driving increases in the previous two years are pushing costs up this year. Inflation has impacted auto repair costs, and drivers are submitting more significant claims. States more affected by climate-related disasters have seen a higher incidence of insurance providers pulling out or writing new policies, leaving buyers with fewer options for insurance shopping.
The make and model of a vehicle have also greatly impacted car insurance costs. Drivers of Kia and Hyundai cars have had difficulty insuring these vehicles because specific models are highly prone to theft.
Are you shopping around for new auto insurance? The Credible marketplace can help you compare multiple providers and find your personalized rate in minutes without affecting your credit score.
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