Buying a Car When Interest Rates Are High

• What this means for you
• Tips for people with a high credit score
• Tips for people with a low credit score
• Other financing tips

If you haven't purchased a vehicle in a few years, you may be in for a shock when you apply for an auto loan. You'll not only have to contend with higher car prices but also a significant increase in interest rates too. Edmunds data for August 2023 shows that the average annual percentage rate (APR) was 7.4% for new financed vehicles and 11.2% for used vehicles, which is the highest they've been since 2015.

Within the past year, the Federal Reserve has raised the rates seven times and rates are now the highest they've been in 22 years. This has translated to an increase of a couple of percentage points from a year ago (5.7% for new vehicles and 9% for used, respectively). And while the Fed kept the rate steady the last time they met in September, experts anticipate at least one more increase in the near future.

With another interest rate hike on the horizon, it's likely that financing a car will only get more expensive in the near term. In addition, car prices remain sky-high as automakers grapple with lower-than-average inventory and union strikes and recover from the semiconductor shortages. Here's what this means for you if you're in the market right now shopping for a car.

What this means for you

If you have a high credit score, rising interest rates won't have as much of an impact on you. Sure, there may be fewer low-rate loans available, but generally you won't have a problem getting approved or finding a loan with a good rate, even though the rate may be higher than what you remember from previous years. Some automakers are offering lower-than-average rates, but you'll need to take on a shorter term loan, anywhere between 36 and 60 months. This means that you'll pay the car off sooner, but your monthly payments will be significantly higher than if you had a typical 72-month loan.

But it's a different story if you have a low credit score. When you couple high vehicle prices with the trend toward longer-term loans, higher interest rates can make a significant difference in the cost of the loan, as you'll see shortly.

Here's a general rule to apply to your own credit situation: On a $40,000 vehicle financed for a common 72-month loan, the finance charges will rise roughly $1,300 for every percentage point increase in the loan. The chart below shows how the interest rate impacts the total price of the loan. If you need something more specific to your numbers, take a look at the Edmunds loan calculator to get a closer approximation of your monthly payment.

If you'd like to see the average interest rate in your state, take a look at our interactive "Car Loan Rates in the U.S. for Used and New Cars" page. Click on your state to see the average APR in the top vehicle categories: SUVs, sedans, trucks and electric vehicles.

Another important item to note is that the average amount financed has steadily risen. This is due to a mix of factors that include inflation, customer preference for pricier SUVs, and the generally rising cost of new cars. In August 2018, for example, the average financed new car loan was $30,993, according to Edmunds sales data. Compare that to the same month in 2023, when the average financed new car loan was $40,186. Loan terms within that same timeframe have more frequently stretched to 72 and 84 months, an indicator of what people are doing to cope with increasing costs. Longer loans mean more money paid in finance charges and a longer time to gain equity in the vehicle.

The numbers shown above reflect the average in the car-buying market, but if you have bad or what the industry calls "subprime" credit — roughly, a FICO credit score of 501-600 — you could easily pay twice the average APR (roughly 11.7%), according to data from Experian) on a new vehicle loan, which means thousands more in finance charges.

There's more bad news for a car buyer with subprime credit looking to buy used. It is not uncommon to see interest rates upward of 18.5%. Using a $30,000 figure that is more in line with the average financed price of a used car, this person would pay $19,877 in interest charges alone, along with a wallet-squeezing monthly payment of about $693. In reality, this person would not be able to handle a car loan of this magnitude and would need to opt for a cheaper new car or a much less expensive used one.

If you have a high credit score:

1. Carefully consider leasing: If you prefer to keep your payments low and forgo a purchase until rates come down, leasing can be an option for you. Take a look at any lease specials the automaker might be offering. They are likely to have the best rates in the current market. But just keep in mind that this is a temporary solution. Buying a car (ideally a certified pre-owned model with a subvented interest rate) and keeping it long after it is paid off is the better financial option in the long run. If you choose to stick with leasing because you simply like being in a new car every few years or can write the expense off, our advice remains the same: Keep an eye out for lease specials, keep the down payment low, and be mindful of the mileage limits.

2. Find a car with a low APR offer: While the days of 0% financing are in the rearview mirror for now, there are still some deals to be had that can keep you at or below the industry average. If you're willing to keep an open mind about brands and models as well as consider models that you might not be familiar with, you can still get a solid financing deal. These days you're likely to see automaker loan rates between 3% and 6%. If there are no advertised finance deals on the car you want, consider another model that may have it.

3. Consider a certified pre-owned vehicle:
A certified pre-owned vehicle (CPO) is a lightly used car that has been given a number of manufacturer-recommended inspections, a thorough reconditioning, and a factory-backed limited warranty. While CPO vehicles are typically more expensive than non-CPO cars, they tend to have promotional financing from the automaker's finance arm. When you combine these lower-than-average interest rates with the added peace of mind from the warranty, a CPO car starts to look more promising. And you probably won't be missing out on modern amenities. "Unlike five to 10 years ago," notes Edmunds' senior manager of insights Ivan Drury, "today's CPOs are likely to have many of the creature comforts you'd look for in the new car, like Apple CarPlay and backup cameras."

If you have a low credit score:

1. Consider buying an older used car: While the average used-car interest rate is higher than a new-car rate, a used car will generally be less expensive than a new one. This means you're more likely to get financed and have a lower monthly payment than if you bought new. Just be mindful of the length of the car loan: An 84-month loan on a used car means you could have an expensive and very out-of-date vehicle on your hands by the time you pay it off.

2. Fix up your car while you fix up your credit: In some cases, the best thing to do may be to maintain your current vehicle while you work on your finances. If you can keep your vehicle running for another year or so, it will allow you to save more for a bigger down payment, which will whittle down the amount you need to finance. You also can use the time to work on improving your credit, and if you're lucky, rates may drop by the time you're ready. Run a copy of your credit report to see which items need attention. In general, you'll want to pay off debt with the highest finance charges first.

Other financing tips

Get preapprovals from other lenders: This advice applies to those with either a high or a low credit score. Take the time to get preapproved by other lenders before you head to the dealership. It will give you a better idea of what the total loan amount will be and give you a basis with which to compare the interest rates that the dealership's lenders may offer.

Buy now, refinance later: If you're in need of a new vehicle now and get stuck with a higher interest rate, there's still hope for you. If interest rates fall in the next couple of years, it's worth checking with your bank or credit union to see if you can refinance the loan at a better rate. Not only will your payments drop, but you'll also be saving money in the long run.