Auto loan rate forecast for 2023: Rates will increase due to Fed decisions
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Drivers have been met with headaches and high prices at the dealership and in loan offices over the last year due to the coupled remaining supply chain issues and high-interest rates. This increase is not predicted to decrease anytime soon, says Bankrate Chief Financial Analyst Greg McBride, CFA.
“For most car buyers – those with average or better credit – rates will remain below 7% on new car loans and below 8% on used car loans,” says McBride. “But consumers with weaker credit profiles will have a much different experience as credit tightens and rates reach well into double digits.”
- Auto loan interest rates are expected to remain high due to moves made by the Fed and vehicle prices potentially remaining high.
- Five-year new car loans are predicted to reach 6.9 percent and four-year used car loans to hit 7.75 percent over the coming year.
What happened to auto loan rates in 2022
Throughout 2022, supply chain issues meant there were fewer cars available to purchase — thus creating a vacuum of steep prices. These sky-high prices are on top of an exhausted economy preparing for a possible recession. On top of this, getting financing has become a challenge for many drivers.
For an explanation of why so many households are living paycheck to paycheck and have strained budgets, look no further than the driveway.
— Greg McBride
As relief was on the horizon and vehicle prices began to level, higher interest rates refuted any substantial wins drivers could receive. The Fed increased the benchmark rate seven consecutive times over the past year, and lenders’ cost to borrow increased in conjunction. According to Bankrate data, the financing for a 60-month new vehicle averaged 3.86 percent in January while the calendar year is closing out with a rate over 6 percent.
Following November’s record-high transaction prices, wholesale prices have dropped over 15 percent. But as prices began to regulate, and relief was found, high-interest rates intensified. So, while prices fell almost 5 percent, monthly payments are up over 3 percent, according to a CoPilot study.
Cost to finance to remain high in the coming year
Although remnants of supply chain and labor challenges will remain, vehicle inventory is expected to increase throughout next year, though not back to pre-pandemic levels. Even though November had a record-high average transaction price (ATP) of $47,681, it was also the first month since the summer of 2021 that the ATP was below the average MSRP, according to Kelley Blue Book. This is good news for buyers but still does not solve the issue of steep rates.
The concurrent increase of rates and decrease in vehicle prices will likely remain consistent through 2023. Rates are expected to continue to increase, explains McBride, “An active Fed will mean further increases in auto loan rates.”
Though rates will be “tempered by competitive lenders,” he explains, drivers should prepare to spend more to finance their vehicles. This is especially true for borrowers with poor credit who will feel the brunt of high rates.
Next steps for consumers
The truth is, there is no perfect time to purchase a car, and high costs across the board make it challenging to find a good deal. If you can wait, patience may save you money. Otherwise, get ready to spend more and consider how to buy in a high-cost, high-rate environment.
“For an explanation of why so many households are living paycheck to paycheck and have strained budgets, look no further than the driveway,” says McBride. “The average monthly payment on a new car is north of $700 and even the average used car buyer is signing up for $500 monthly payments. Those are budget-busting payments.”
To keep your budget healthy and find the best deal on your car purchase, follow these steps.
- Stay current on credit card and loan payments — a history of timely payments boosts your credit score, which will qualify you for lower interest rates.
- Shop around with a few auto loan lenders to see which offers you the best deal.
- Time your car purchase to align with any seasonal deals dealerships may still offer.
- Be flexible; with less inventory, you may need to come prepared with backup car colors or models.
- Expand your search to several dealerships and research MSRPs before you head in for a test drive.