Auto loans are getting more expensive

The average car loan amount increased by 8.59% during the year 2022, according to figures published by Experian. This increase is lower than pandemic-era peaks – the cost of auto loans rose nearly 22% on the year from Q3 2020 to Q3 2021 – but could still have a significant impact on consumers looking to finance a new or used vehicle.

There are two main reasons for this increase: rising car prices and high interest rates. Since the Federal Reserve began raising interest rates late last year, interest rates for many types of loans have risen. However, there is still a lot of variation in the interest rates offered by different auto loan providers, making it more important than ever to shop around.

The value of car loans increased by 8% in 2022

Data released by Experian indicates that the cost of auto loans continues to rise relatively rapidly. In the third quarter of 2022, the average amount of used vehicle loans increased by 8.59% compared to the same quarter of 2021. This brought the average auto loan in the third quarter of 2022 to $28,506.

An 8% increase is relatively moderate compared to the fluctuations the auto loan market has seen over the past two years. In the third quarter of 2021, for example, there was a 21.37% year-over-year increase in the average value of auto loans. It seems like we’re past the peak of the pandemic era, but auto loans are still getting more expensive.

There are two main reasons for this increase: car prices and interest rates. The price of new and used cars has risen dramatically during the pandemic as shortages of semiconductor chips have slowed production of new vehicles. This has led many consumers to choose to buy used cars, increasing demand and driving up prices.

The other main factor driving up the value of the average car loan is the interest rate. Since the Federal Reserve began raising interest rates nearly a year ago, interest rates on a wide range of credit products have followed suit, including auto loans. Experian found that the average interest rate during the third quarter of 2022 was 5.16% for new vehicle loans and 9.34% for used loans, a small but significant increase from 4 .09% and 8.12% in 2021.

The combined effect of these factors has pushed the cost of a car loan to a major milestone. The average loan amount for a new vehicle also increased to $41,665. Combined with high interest rates, that means the average new car loan now costs over $700 a month.

How to get a car loan

For consumers, the rising cost of auto loans makes shopping even more important. When choosing an auto loan, there are four main factors to consider. We mentioned two above: the total amount you want to borrow and the interest rate your lender will charge. However, you should be aware that additional fees and your credit score can also affect the cost of your loan.

Your credit score is especially important when taking out a car loan (and most other forms of consumer credit). The interest rate offered to people with good credit ratings can be much lower than that offered to borrowers with poor or incomplete credit history. In Q2 2021, for example, borrowers with a credit score of 781 or higher received an average APR of 2.34% for new cars and 3.66% for used cars; those with credit scores between 601 and 660 were offered APRs of 6.61% for new car loans and 10.49% for used loans.

Such is the importance of your credit score when it comes to getting a good deal on a car loan, in fact, it’s almost always a good idea to check your credit report and correct any errors before even begin to review the terms of the loan. Only then should you shop around with multiple lenders, including major banks, community banks, credit unions, and online lenders. Be sure to compare rates, terms, credit score requirements, and other factors that may affect the cost of your loan.