With interest rates up, you will be paying more to buy a car next year.
- Auto loan interest rates have more than doubled since the beginning of the year.
- The total interest paid is about 140% more than the same car purchased earlier this year.
- Be sure to consider other costs of car ownership when determining your auto purchase budget.
A car is a big purchase — for most people, it’s the second-largest purchase they’ll make after a house. So, it’s important to understand all the costs associated with owning a car before you make the decision to buy. Since the beginning of the year, the Federal Reserve has raised interest rates six times, going from 0% to 3.75% in the fastest cycle in history. It has also pushed borrowing costs to a 15-year high.
Auto loan rates have more than doubled
Auto loan interest rates aren’t directly tied to the federal funds rate, but they are influenced by it. The recent rate hikes will not affect current auto loans, but drivers taking out new car loans or those with variable-rate financing have started to see costs rise. For the first quarter of 2022, the average new car interest rate was 4.07%. Since then, the average auto loan rate has more than doubled to 9.31% for those with excellent credit. Currently, average auto loan rates for bad credit, or subprime borrowers, are at a whopping 20.45%.
New car prices are at an all-time high
The price of both new and used cars have hit an all-time high this year. The average price for a new vehicle was $48,094 in September. This is a slight drop from August’s average car price of $48,240, but still 6.1% ($2,775) higher than a year before. Comparing the average auto interest rates earlier this year, here’s how much a car loan could cost you in 2023 (assuming a 60-month loan with no down payment).
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For a new car loan at 4.07%
Total Loan Amount: $48,094.00
Monthly Payment: $887.24
Total Loan Interest: $5,140.66
Total Cost: $53,234.66
For a new car loan at 9.31%
Total Loan Amount: $48,094.00
Monthly Payment: $1,005.60
Total Loan Interest: $12,242.23
Total Cost: $60,336.23
The total interest paid with the higher interest rates is about 140% more than on the same car purchased earlier this year. In addition, the changes in auto loan rates are largely based on other factors, like your credit score. Using the 20.45% interest rate for subprime borrowers, their monthly payment would be close to $1,300, and the total interest paid would be just under $30,000, six times more than a loan from earlier this year.
As you can see, the total cost of a car loan can vary based on your credit score and interest rates. It’s important to keep in mind that these are just estimates; your actual costs may be higher or lower depending on your individual circumstances. And remember, this is just the cost of the loan. There are other costs associated with owning a car, like auto insurance, gas, and maintenance. When you’re considering whether to buy a car, be sure to take all these costs into account so you can make an informed decision.
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