When the time comes to purchase your next vehicle, the focus should be on finding the dream car rather than struggling to secure affordable financing. However, the car market has experienced significant shifts since the early days of the pandemic. Inflation has made it challenging to find competitive interest rates, and supply chain issues have driven average car prices above the Manufacturer's Suggested Retail Price (MSRP). Before embarking on the quest for summer deals on new wheels, it is crucial to comprehend how the state of the economy will influence the price of your desired car.
Economic Outlook Makes Lenders Cautious
Securing vehicle financing has become a challenge for borrowers due to a primary issue: the scarcity of cars. Satyan Merchant, SVP and Head of TransUnion's Auto Finance Business, explains that the current state of the economy has shifted the lending environment, making car purchases a challenge even for those who have found their perfect set of wheels. Lenders have tightened their standards, resulting in a decrease in vehicle loan originations. Moreover, higher interest rates have made even affordable vehicles financially demanding.
Vehicle Originations Down
With vehicle prices remaining above average compared to pre-pandemic years and interest rates still on the rise, it is no surprise that buyers are increasingly cautious. TransUnion data reveals that vehicle loan originations in the third quarter of 2022 closed with 6.6 million, down from 7.3 million in the same quarter in 2021. Interestingly, while subprime borrowers typically receive the worst rates, originations in this credit band experienced the smallest decline compared to other credit bands. This can be attributed to the fact that many subprime borrowers still require financing to afford a vehicle, even if it means accepting less favorable rates.
Lenders Tightening Their Standards
In response to the increased cost of lending, lenders, including banks, credit unions, and online lenders, are facing similar economic constraints as borrowers. Consequently, they must tighten their spending and lending habits. The Dealertrack Credit Availability Index indicates a tightening of credit availability in May, reaching its lowest level since February 2021, making it currently harder to obtain auto financing than in the past two years. Auto loan approval rates are also down year over year, leading to more rejections from lenders.
Potential Wins of Cheaper Cars Negated by High Rates
While there has been a slight decline in average new-vehicle transaction prices in certain months, the cost of financing these vehicles has risen. The factors influencing monthly payments, such as the amount financed, loan terms, and interest rates, have contributed to an upward trend in average monthly payments for both new and used vehicles. This poses a challenge for borrowers, particularly those with poor credit, as good deals are harder to secure, and rates are not expected to drop soon.
How to Get Vehicle Financing Even with High Rates
As higher interest rates become an unavoidable reality for the foreseeable future, those planning to purchase a new vehicle need to be strategic in securing the best auto loan. Some tips to consider include shopping around and comparing financing options from multiple lenders, applying for loan prequalification to understand expected monthly payments better, adding a co-signer with strong credit if needed to improve rates, and calculating the true cost of ownership to ensure affordability.
Conclusion
Navigating the current car market amidst economic shifts requires careful consideration and planning. With inflation impacting financing, borrowers should be prepared to allocate more funds toward the purchase of their dream car. Lenders' caution makes it essential for those with strong credit to seek competitive rates. By taking the appropriate steps and being well-informed, borrowers can navigate the economic landscape and secure the best financing option for their new vehicle.
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