By Chris Taylor
NEW YORK (Reuters) – The feeling of driving a new car off the lot is hard to beat. What comes next is not so pleasant: the first monthly payment.
This bill has additional impact these days. New car buyers with a monthly payment of more than $1,000 hit an all-time high of 16.8 percent in February, according to data from auto information site Edmunds. This represents an increase of 15.7% from the fourth quarter of last year.
Rates are expected to rise after the US Federal Reserve raised rates by a quarter of a percentage point on Wednesday.
“It’s unprecedented,” said Ivan Drury, Edmunds’ chief information officer. “It’s the acceleration that’s the most surprising: the combination of average transaction prices going up a lot over the last couple of years and interest rate hikes. It’s certainly hitting people hard.”
While car prices have been stabilizing as the supply chain normalizes, interest rates are tightening buyers’ wallets. Average interest rates on new car financing rose to 7% in February and an “ugly” 11.3% on used cars, Drury said.
A monthly car payment of over $1,000 is starting to take its toll. The percentage of auto loans in transition to delinquency (more than 30 days past due) has been rising over the past three quarters, according to the New York Fed’s Household Credit and Debt Report.
Punishing interest rates are forcing car buyers to make tough decisions. Here are four survival tips.
IMPULSE THE SAVING
One obvious way to avoid high interest rate hell, if you have the means, is to invest more cash. That’s exactly what shoppers have been doing. Edmunds data showed the average down payment in the fourth quarter of last year was the highest ever, at $6,780 for new cars and $3,921 for used cars.
Without extra cash on hand, the temptation is to stretch the financing further and further to minimize the monthly impact.
“I recommend paying cash for a car or being able to pay off the car in less than three years,” advised Kassi Fetters, a financial planner in Anchorage, Alaska. “If you can’t do that, you’re looking at a car outside of what you can afford.”
RE-ASSESS YOUR PRE-ORDER
When the supply chain was clogged and new cars were in short supply during the pandemic, buyers paid deposits with a lead time of many months. Since then, interest rates have risen and used cars have become cheaper, so what made sense then no longer applies.
“For them it can be a dangerous situation, because they are no longer in control,” Drury said.
If you can get out of that pre-order without too much damage, or transfer that deposit to a more modest purchase, as dealers allow, it might be worth considering.
CHANGE IF NECESSARY
It might be time to admit that your eyes were bigger than your wallet.
“If you’re already tied up with a big car payment, then I suggest you sell it and get a car you can actually afford,” Fetters said.
If you’re trading up for a more humble ride, look to the basic offerings instead of splurging on fully loaded versions with high-end trimmings. Deals can be found on models that haven’t been completely redesigned in a few years, or certified pre-owned vehicles that sometimes come with subsidized interest rate deals.
A major obstacle is “negative equity,” meaning you owe more on the car than you can sell it for. Since a car is a depreciating asset and used car prices are down from their highs, your trade-in may not help you as much as you hoped.
WE PAY MORE ATTENTION TO DEALER INCENTIVES
When interest rates are near rock bottom, special offers like 1.9% or 2.9% financing may seem unattractive. Now, this can mean the difference between a comfortable or stressful monthly payment.
These deals are unlikely on newer cars, so you may have to focus again on last year’s model.
“Find something where the interest rate is more manageable and subsidized,” Drury suggested. “We’re finally starting to see the incentives go up a little bit more and spread out a bit more.”
(Editing by Lauren Young and Richard Chang; Follow us at @ReutersMoney)
