Edmunds: Interest Rates Putting Brake on Car Sales

Record-high interest rates have become the largest barrier to buying a car for many Americans, according to a report Monday from Edmunds.

The consumer-oriented automotive analysis company based in Santa Monica, Calif., found the average annual percentage rate (APR) on new financed vehicles in the first quarter was 7% – the highest rate Edmunds has on record since the first quarter of 2008. The rate was up from 4.4% a year earlier and 6.5% in the fourth quarter.

However, after 14 months of increases, the new car APR remained flat from February to March, which Edmunds analysts attributed to a moderate increase in subsidized financing by automakers.

Average rates for used cars were 11.1% in the first quarter, up from 7.8% a year earlier and 10% in the fourth quarter.

“Since inventory levels are improving, interest rates are now topping the list of the greatest obstacles that automakers will be facing in 2023 to move metal,” Jessica Caldwell, Edmunds’ executive director of insights, said.

Edmunds also found:

• Average new monthly car payments were a record $730 in the first quarter, up 11.3% from a year earlier and up 1.8% from the fourth quarter.
• Average used car payments were $551 in the first quarter, up 1.7% from a year earlier but down 2.1% from the fourth quarter.
• 8% of consumers who financed a new vehicle in Q1 2023 committed to a monthly payment of $1,000 or more — a new all-time high according to Edmunds. It compared with 10.3% a year earlier and 6.2% in 2021’s first quarter.
• The average down payment for a new vehicle climbed to a record high of $6,956 in the first quarter, compared to $6,083 a year earlier.
• Terms for new car loans were 68.8 months in the first quarter, about a month shorter than the previous periods. Terms for used cars were 70 months in the first quarter, about 12 to 16 days shorter than the previous periods.

Ivan Drury, Edmunds’ director of insights, said the static terms hide the fact that 12.3% of consumers opted for 36- or 48-month loan terms in the first quarter – the highest Edmunds has on record since the fourth quarter of 2009 – while a majority of consumers have been extending loan terms out as much as possible in order to increase affordability.

“It takes money to save money in today’s market,” Drury said. “Although more automakers are offering to subsidize auto loans with lower interest rates, the catch is that most of these offers require that consumers agree to shorter 36- or 48-month loan terms – which might put people off at first glance.

“If you’re a qualified buyer and have the means to put more money down, whether in cash or via your trade-in, know that you have a serious advantage – you’ll be committing to a much larger amount toward the down or monthly payment, but you will save up to tens of thousands of dollars over the course of your auto loan.”

The findings were similar at Cox Automotive, which reported March 27 that the average new car price in March was nearly $49,000, up 5% from a year earlier.

With higher interest rates, Cox found the average loan payment in March was $784, up 29% from March 2020 when the COVID-19 pandemic began. That translated into annual increases of 10% per year, compared with pre-pandemic average increases of 3% to 4%.