There’has never been a worse time to buy a car. According to Consumer Reports, there are more new cars available than a year ago, but prices continue to rise because production favors more expensive models. The used car market is equally gloomy: prices fell in December 2022, everyone rushed to take advantage of the price drop in January, and now used car prices are on the rise again.
NOTNew and used cars are more expensive
The gold standard of buying a car always pays in cash and in full—the exact opposite of that is signing a lease. (Whatever you do, never rent a car if you can avoid it.) That leaves most buyers with only one option: get an auto loan. But with interest rates and list prices continuing to rise endlessly, financing a car is much more expensive than it was a few years ago.
Interest rates on used car loans are higher than new vehicle loans to start, and both are only increasing: in January 2023, the average new loan rate was 8.41% and the average utilization rate was 12.88%, according to Kelley Blue Book. (A year ago, these figures were 5.3% and 9.4% respectively). the average price of a new car is nearly $50,000 And the average used car is still nearly $30,000it is easy to be extremely disappointed.
If you are looking for a new or used vehicle car, you can feel screwed no matter what you do – and in a feel, you’re right. There’s no GOOD (read: cheap) way to buy a car right now, but if you absolutely need it, some financing options are better than others.
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Least bad: Take a credit union loan
Credit unions offer car loans at significantly lower rates than banks, and often at lower rates than dealerships, although some dealerships offer comparable rates specifically to compete with credit unions. The downside is that credit unions are for members only and may have stricter credit score requirements than other financing options. (A credit union won’t punish you for a low credit score with an exorbitant interest rate, but if your score isn’t high enough, you won’t qualify for a loan at all.) other, see what a local credit union may have offers that are a great reference for comparison shopping, especially if you already bank with one.
Slightly worse, but probably good: a bank loan
Getting a car loan from a bank has the same pros and cons as getting a loan from a credit union, but with slightly less attractive interest rates. Banks tend to be a bit more ‘lenient’ on borrowers with low credit scores, which can help, but expect to be penalized with a higher interest rate.
Riskiest: Dealer Financing
Finance the purchase of a car through a reputable dealership can be an attractive option. The “one stop shop” aspect is convenient, and if you have a strong negotiating position, such as a flawless credit score or the ability to make a large down payment – you may be able to negotiate a better deal than a traditional loan from a bank or credit union. But bad car dealerships often engage in predatory lending practices that make buying a car even more expensive than it already is, especially for people who really need a car and who have no financial weight to spend.
Dealer loan interest rates vary by region, but typically are higher than those from banks and credit unions. Depending on your financial situation, this may already be a dealbreaker. But higher rates aren’t the only reason to err on the side of a dealer loan. A recent NPR article describes the practice of ‘yo-yoing’ car sales, in which a dealer disclaims what the buyer assumed was a completed sale. The article focuses on a rural Florida couple who traded in their old car for a new model, then three weeks later received a call from the dealership saying financing had “failed” and he had had to sign a new contract with worse conditions. if they wanted to keep their car. AAnd they had already sold the exchange, so they couldn’t get their old car back either.
It happens more often than you might think — NPR surveyed about 40 attorneys, who said they received calls from 900 buyers in the past year alone about yo-yo car sales — and it has devastating consequences. It’s also just the most recent example of bad tricks car dealerships will shoot for you to sign a contract.
Ultimately, the best way to protect yourself as a potential buyer is to shop around and read all the fine print before signing anything, especially if you’re considering going the dealer financing route. It may not be the ideal time to buy a car, but with a little more research and vigilance, you can find something that works for you.