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High interest rates undermine new auto incentives for car shoppers

To effectively navigate the current market, car shoppers should adopt a proactive approach before stepping into a dealer's showroom.

Incentives are re-emerging in the auto market, but high interest rates are diminishing their appeal to car shoppers. According to Edmunds, the average annual percentage rate (APR) for new car loans stood at 7.1% in the first quarter of 2024, marking the fifth consecutive month of rates above 7%. Used car loan rates also increased to 11.7% in the same period, slightly up from the previous quarter.

Despite high borrowing costs, buyers can still benefit from reintroduced financing offers and incentives like discounts and dealer cash, though finding these deals requires more research than before. Brian Moody, executive editor at Kelley Blue Book, advises shoppers to look for deals model by model.

It is crucial to understand that financing offers are not one-size-fits-all. Loan terms play a significant role, with short-term loans typically offering better interest rates and long-term loans providing lower monthly payments. However, extending loan terms can lead to negative equity, a situation where the car’s value is less than the remaining loan balance, potentially causing financial strain.

Jessica Caldwell, insights analyst at Edmunds, stresses the need for realistic planning, especially regarding how long you intend to keep the car. Moreover, the share of negative equity trade-ins rose to 23.1% in the first quarter, up from 18.3% a year ago and 14.7% in the first quarter of 2022. The average negative equity hit an all-time high of $6,167, and the average monthly payment for new car shoppers trading in underwater loans was $887, with an average APR of 8.1% over 75.8 months.

To effectively navigate the current market, car shoppers should adopt a proactive approach before stepping into a dealer’s showroom. Start by researching available incentives, as deals are now more scattered compared to two years ago. Pay attention to models that are not in high demand, as automakers and dealers rarely offer incentives on popular models. To qualify for the best financing offers, it is crucial to understand your credit score, as 0% financing is often reserved for buyers with excellent credit. Lastly, consider pre-qualifying for different loans at banks or credit unions to determine the best interest rates and compare offers.. This level of preparation not only aids in negotiating with dealers but also allows you to leverage better terms and potentially secure a more favorable deal.

Understanding the total interest paid over the life of the loan is crucial. “The quicker you pay it off, the less interest you’re paying,” Moody emphasizes. Caldwell advises being mindful of the full financial picture, as longer loan terms may seem attractive but can lead to higher overall costs.

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