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Auto loan rates fall but monthly payments reach record high - what’s driving that?

Auto loan rates fall but monthly payments reach record high - what’s driving that?
(Image credit: Getty)

Americans buying a new car are taking out record high loan amounts and having to make record high monthly payments, as the pandemic continues to impact the US auto industry. According to Experian, the average auto loan amount for a new vehicle increased nearly $2,000 year-over-year to reach $35,228 in the final quarter of last year, while the average monthly payment increased $13 to $576 over the same period. 

A similar pattern was also seen in the market for used cars, where the average loan amount increased from $20,824 to $22,467 year-over-year, and average monthly payments increased $18 to $413, surpassing $400 for the first time.

What’s driving auto prices higher?

What may surprise car buyers having to dig deeper into their pockets is that the interest rates charged on the best auto loans actually dropped over the quarter. The average rate for a new vehicle loan fell to 4.31%, down from 5.25% a year earlier, while interest costs on used cars fell from 9.05% to 8.43% over the same period. 

That leaves a rise in the price of the cars themselves as the only explanation for the increase in loan and payment amounts, something which the report says has likely been driven by buyers’ increasing preference for larger vehicles such as pickups and SUVs. Indeed, in the final quarter of last year, more than half of new vehicles financed were small and mid-sized SUVs. 

Auto loan rates fall but monthly payments reach record high - what’s driving that?

(Image credit: Getty)

New cars back in favor

Some buyers who suddenly found themselves with stimulus checks, and who didn’t need to use the funds to keep their immediate finances afloat, are also likely to have been able to spend more on higher spec models, according to Experian, while lower stock levels - resulting from factory lockdowns - will have pushed prices higher too.   

Last summer’s pandemic-related trend towards buying used cars rather than new ones also appears to have fallen away, inevitably meaning people will be spending bigger on the latest vehicles off the production line. In particular, the report found that buyers with strong credit had recently been shifting away from used vehicles, back into financing new vehicles.

Keeping cars affordable

Following the increases in average loan amounts and payments, Melinda Zabritski, Experian’s senior director of automotive financial solutions, says “affordability will continue to be an important topic to pay attention to, particularly as market conditions continue to develop in 2021”. 

“The events of 2020 disrupted the automotive industry and we’ve seen some consumers shift away from patterns that have been cemented over previous quarters such as opting for used vehicles,” she added. “While we can likely attribute some of the change to stimulus checks, carry-over incentives and tight inventory, we find ourselves in uncharted territory.” 

Auto loan rates fall but monthly payments reach record high - what’s driving that?

(Image credit: Pixabay)

For motorists, this means making car-buying choices that are within their financial means. With research recently showing the cost of owning a car in the US has passed $9,500, for some, the priority will always be finding the vehicles that are cheapest to run

Securing the lowest rates on car loans is one way of keeping costs down, but will usually require a decent credit score to show the lender that you’re good for what you wish to borrow. It’s also possible to save hundreds of dollars simply by shopping around for the best auto insurance.  

If buying second-hand, there’s a good chance you’ll be spending less if you were to buy a new car, but then the price attached to the best extended car warranties and the cost of roadside assistance cover could become major considerations too. 

Tim is Finance Editor at Top Ten Reviews. With over 20 years’ experience in the financial services industry, Tim has spent most of his career working for a financial data firm, where he was Online Editor of the consumer-facing Moneyfacts site, and regularly penned articles for the financial advice publication Investment Life and Pensions Moneyfacts. As a result, he has an excellent knowledge of almost areas of personal finance and, in particular, the retirement, investment, protection, mortgage and savings sectors. A keen armchair follower of most sports, Tim regularly plays soccer, and also enjoys attending live music events, when not having to chase after his two children.