While inventory levels continue growing, soaring auto loan interest rates are tapping the brakes on new car sales. The expense of financing a vehicle purchase is reaching all-time historical highs.
According to research by Edmunds, 16.8 percent of new car buyers in Q1 2023 committed to paying $1,000 monthly or higher on their loan. This represents a significant increase from the already elevated 15.7 percent of buyers taking on such a payment in Q4 2022.
The annual percentage rate or APR of new car loans also reached 7 percent, exceeding all APRs seen since Q1 2008. Average buyers are paying $730 monthly in Q1 2023, up approximately 11.3 percent year-over-year.
Q1 down payments on new vehicles also achieved previously unseen highs, surging 14.4 percent above Q1 2022 levels to $6,956. Edmunds notes that the combination of record-high monthly payments and large down payments is driving many new car buyers to seek the longest possible loan terms.
Opting for a longer loan term reduces monthly payments, but sharply increases APR and total interest payments over the life of the loan. Customers signed up for loans with a 67-month term or longer for 67.3 percent of Q1 2023 new car purchases. 30.5 percent of loans had terms longer than 72 months, while only 4.7 percent had a 36-month term or shorter.
The executive director of insights at Edmunds, Jessica Caldwell, remarked that “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.”
Caldwell went on to note dealerships or automakers could turn this situation to their advantage by being the first to offer significant incentives targeting interest rates. She described such incentives as “a powerful marketing tool that would enable sellers to tap into the significant pent-up demand” resulting from limited new car inventory in the wake of COVID-19 and semiconductor chip shortages.
For now, most incentives are being offered in combination with short-term automotive loans, with 36-month or 48-month terms. These terms also have the highest average monthly payments and down payments up to three times the amount of a 73- to 84-month loan down payment. These accompanying costs have been limiting the positive effect of most recent incentives on sales.