The intricate dance between interest rates and the economy often influences our financial decisions, and the auto industry is no exception. A while ago, we explored how recent market trends affect used car values. Today, we’re delving deeper into the increasingly apparent influence of rising used car loan interest rates on the decisions of buyers in the used car market.
Over the past year, the average used car loan interest rate has seen an upswing of roughly 2.5%. This may not sound like much at first glance, but for the prospective buyer, it can mean significantly more in interest over the life of their loan.
Let’s break it down by credit score:
Great Credit (781 – 850): Interest rates jumped from 4.19% in Q2 2022 to 7.09% in Q2 2023, a notable 2.9% increase. During the same period the average payment rose from $492 to $508.
Good Credit (661 – 780): The rates surged from 6.09% to 9.06%, a 2.97% increase. During the same period the average payment rose from $512 to $523.
Fair Credit (601 – 660): Borrowers in this category saw their interest rise by 2.98%, moving from 10.51% to 13.49%. During the same period the average payment rose from $537 to $542.
Poor Credit (501 – 600): Those with lower credit scores experienced a 2.12% spike, shifting from 16.37% to 18.49%. During the same period the average payment rose from $534 to $543.
Bad Credit (300 – 500): This segment, already contending with exorbitant rates, had a lesser, yet still impactful, increase from 20.02% to 21.38%, amounting to 1.36%. During the same period the average payment rose from $516 to $523.
Considering that people with bad credit are already paying considerably higher interest rates, even a small percentage increase can amount to a substantial dollar figure over the term of a car loan.
Used Car Loan Data
| Q2 2021 | Q2 2022 | Q3 2023 | |
| Avg. Payment | $440 | $519 | $528 |
| Avg. Loan | $24,059 | $28,607 | $26,863 |
| Avg. Value | $25,090 | $27,720 | $26,577 |
| Avg. LTV | 104% | 97% | 99% |
Yet, there’s another layer to this narrative. While interest rates were climbing, there were notable shifts in the behavior of buyers and lenders. Data reveals that between Q2 2021 and Q3 2023, the average used car loan payment only climbed from $440 to $528. This modest increase in payments could be attributed to the rise in interest rates.
More intriguingly, the average loan amount was reduced by $1,744 from Q2 2022 to Q3 2023, settling at $26,863. This indicates a cautious approach, where people might be opting for less expensive cars or making bigger down payments, leading to smaller loan amounts. The average value of used cars followed suit, seeing a slight dip.
If you’re crunching the numbers, this brings up an interesting trend: people are borrowing less and paying more. The loan-to-value ratio, which was 104% in Q2 2021, tightened to 99% by Q3 2023. A smaller gap between the loan amount and the vehicle’s value can be indicative of both the caution of the lenders and the prudence of the borrowers.
But what’s next? Will this trend of reduced borrowing against a backdrop of increasing interest rates persist?
While the used car market, like all markets, is subjected to a multitude of factors, interest rates undeniably play a pivotal role. With whispers about the Federal Reserve possibly raising interest rates again, it’s reasonable to anticipate further increments in used car loan interest rates.
Wrapping It Up
As used car loan interest rates rise, both consumers and lenders seem to be recalibrating their strategies. Borrowers appear more cautious, perhaps opting for more affordable vehicles, while lenders might be exercising greater discretion in loan disbursals. While predicting the exact future of the used car market remains challenging, current trends underscore the intricate relationship between broader economic metrics and individual financial decisions. As always, potential buyers should keep a close eye on these developments to make informed decisions in an ever-evolving landscape.
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