Car deals are easier to find, but lenders are tightening their terms

More new cars are available this spring, and manufacturers have even started offering deals to entice buyers.

But at the same time, lenders have tightened the terms of auto loans as they deal with a rising number of delinquencies. That has made it harder for some people to get affordable loans.

There was generally access to car loans for both new and used cars worse in January than in December and lower year over year, according to Dealertrack, a Cox Automotive service that tracks credit availability based on factors such as loan approvals, terms and down payments. The impact was seen at banks, credit unions and dealerships.

“We’re seeing access to credit tighten across all channels,” said Sean Tucker, editor-in-chief at Kelley Blue Book, Cox’s auto research and sales website.

Subprime borrowers in particular — consumers with the lowest credit scores — may have trouble finding financing, Mr. Tucker said. The share of subprime loans for new cars has fallen to about 6 percent, about half of what it was before the pandemic.

Borrowers with a strong creditworthiness are particularly attractive to lenders. The average creditworthiness The number of new car buyers taking out a loan or lease rose to 743 at the end of 2023, up from 739 a year earlier, according to fourth-quarter data from Experian Automotive, which tracks auto financing. For used cars, the average score was 684, up from 681. (Experian’s report uses VantageScore 3.0 scores, ranging from 300 to 850; scores of 661 and above generally qualify for favorable terms.)

People are become delinquent on auto loans (and credit cards) at higher rates than before the pandemic, according to the Federal Reserve Bank of New York’s February report on household debt and credit in the fourth quarter of 2023.

“This indicates increased financial stress, especially among younger and lower-income households,” said Wilbert van der Klaauw, economic research adviser at the New York Fed, in a statement about the findings.

Delinquencies for all types of consumer debt fell during the depths of the pandemic in 2020 and 2021, the Fed report said, but have risen as savings from stimulus aid decline and pauses on mortgage and student loan payments have expired.

Auto loans secured in 2022 and 2023 are having more trouble so far than previous loans, “perhaps because buyers faced higher car prices in those years and may have been under pressure to borrow more at higher interest rates,” according to researchers at the New York Fed. a blog post. Interest rates on auto loans are influenced by the Federal Reserve’s benchmark interest rate, which has risen during the Fed’s campaign against high inflation.

Although both car prices and average loan amounts have started to decline in the past year, monthly payments have not, partly due to higher interest rates on car loans, according to Experian. The average monthly loan payment for a new vehicle was $738 at the end of last year, up from $720 in 2022. The average for a used vehicle was $532, up slightly from $530.

The average interest rate on a new car loan was 7.18 percent at the end of 2023, compared to 6.08 percent in 2022, according to Experian.

Interest rates can affect down payments. Heading into 2020, a 10 percent down payment was common. But it has been rising and has hovered around 15 percent in recent months — likely as buyers try to lower their monthly payments, according to Cox Automotive.

Now that there is ample inventory of new cars, dealers have started offering incentives such as cashback rebates. Dealers typically like a 60-day supply of cars, but the average now is about 80 days, Mr. Tucker said. That means manufacturers can offer deals to get vehicles off the sales lots. “Supply is excellent,” he said, in contrast to the shortages that drove up prices during the pandemic.

However, used car buyers will find that even though prices have stabilized, “they’re still quite high,” says Benjamin Preston, auto writer for Consumer Reports.

There is an argument for waiting a while, if you don’t have to buy a car right away. Automakers that emphasized more profitable, high-end models with luxury features during the pandemic are expected to ramp up production of more affordable cars in the coming months, Tucker said. And the Fed has indicated it could cut rates sometime this year, which could make loans more affordable.

Lower interest rates are now possible — if you have prime credit and can afford a shorter loan term, which means higher monthly payments, says Rod Griffin, senior director of public education and advocacy at Experian. (Longer-term loans — those that last six to seven years — had an average interest rate of about 9 percent, Experian found.)

Recently, Honda offered 2.9 percent financing, with a term of 36 months, for Honda CR-Vs; Subaru offered 1.9 percent with a 48-month loan on Outbacks.

Here are some questions and answers about car shopping:

How can I prepare for buying a car?

Prepare early, Mr. Griffin advised — at least six months before you plan to buy. Check your free credit report and, ideally, your credit score. (Ask your credit card company or lender before paying for a score. Many provide it for free to their customers). Take all possible steps (such as paying bills on time) to improve your profile.

Then buy your loan and your car separately, Mr. Tucker said. Make sure you get pre-approved from your bank or credit union and take that offer to the dealer to see if they can beat it.

Is there a new rule for car purchases?

Yes, but it is not yet in force. The Federal Trade Commission finalized this last year CARS ruleto combat fraud in the car retail sector, aimed at protection car buyers of hidden costs and pricing tactics. The commission said the rule would make it easier to shop around based on a car’s actual price and save buyers an estimated $3.4 billion a year.

The rule was to debut at the end of July, but the agency postponed pending the outcome of a legal challenge by industry groups. “We continue to believe that the rule is unnecessary, redundant and confusing and will unnecessarily lengthen the auto-selling process for consumers,” said the National Automobile Dealers Association, one of the rule’s proponents. opponentssaid a statement.

What should I do if I cannot pay my car loan?

The Federal Trade Commission recommends contact your lender immediately. Some lenders may agree to work with you if you can continue making payments even if they are late.

If you don’t pay, the lender can confiscate your car. You may owe the difference between what your lender gets from selling the car and what you still owe on it, as well as costs associated with the repossession. In addition, if a lender repossesses the vehicle, it may become more difficult and expensive to obtain credit in the future. Know your rights, which vary by state. Please contact your office of the attorney general.