The Federal Reserve's aggressive interest rate hike has pushed auto loan rates to new highs and Americans now owe more on debt to finance their cars than they do on student loans, a recent blog said.
For the first time, auto loan debt has surpassed student loan debt, according to Automoblog. At the end of Q2 2023, auto loan debt surpassed student loan debt in total – auto loan debt rose to $1.58 trillion, edging out $1.57 trillion in student loan debt.
Part of why auto debt has increased is because of rising interest rates. The Federal Reserve has raised interest rates 11 times since March of last year, pushing the federal funds rate to a 22-year high of 5.25% to 5.5% to slow the economy and lower soaring inflation. In that time, the annual percentage rate (APR), or the amount Americans pay to finance a new car, rose to 7.4%, while used vehicle rates increased to 11.2% since the second quarter, according to a recent Edmunds survey.
The dramatic rise in annual percentage rates (APRs) since 2022 has played a substantial role in increasing car payments above the rate of student loan payments, but it's not the only factor impacting auto loan debt.
"Perhaps the biggest factor contributing to auto loan debt is vehicle prices," Experian Head of Automotive Financial Insights Melinda Zabritski told Automoblog. "Inventory shortages led to an uptick in vehicle pricing, resulting in car shoppers having to take out larger loans. While we've seen that trend level out a bit, consumers are also financing more expensive vehicles. For instance, SUVs made up more than 60% of new vehicles financed in Q2 2023."
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. Visit Credible to shop around and find your personalized premium without affecting your credit score.
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As auto debt surges, so has the rate of missed payments. According to the Federal Reserve, auto loans delinquent for 60 days or more increased again in September for the fifth month, up 13.3% on the year. Delinquency among subprime borrowers reached a nearly 30-year high in September of 6.1% – the highest rate since 1994.
Lenders have responded to the evolving automotive landscape by tightening restrictions on auto financing. Roughly 30% of lenders responding to a recent Fed survey said their lending standards had become significantly more stringent. Some auto finance lenders, like Citizens Financial Group, have left the market altogether, while others, such as Capital One have reduced the auto loans portion of their business.
"With lenders leaving the market, less credit available, more expensive vehicles and less inventory, demand will decrease as customers are edged out of affordability," Zabritski said.
Shopping around for new auto insurance can help lower your costs. The Credible marketplace can help you compare multiple providers and find your personalized rate in minutes.
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You can take these steps to lower your financing costs to purchase a car in the current high-interest environment.
There's no universal minimum credit score required for a car loan. Still, in a tighter lending environment, credit scores can significantly affect your ability to get approved for a loan and terms. Many banks are less likely to approve auto loan applications from borrowers with FICO scores of 620 and sometimes even a score of 680 could get rejected, according to the recent Fed survey.
Making a down payment on a car loan could help your chances of getting approved and may result in a lower rate. Paying more upfront also helps decrease the amount you need to borrow, which means less interest paid overall.
Searching for pre-approved financing in a high-interest-rate environment could help you find a better deal. Consumers should shop for pre-approved financing as diligently as they shop for an actual vehicle.
A used vehicle could yield a better bargain than an outright new one. Many cars lose 20% of their value within the first year. You can capture that savings by purchasing a newer used car.
If you are struggling with rising car prices and want to save money, you could consider finding a new auto insurance provider to lower your monthly premium. You can visit Credible to compare multiple car insurance providers at once and choose the one with the best rate for you.
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