Bankrate Predicts Auto Loan Interest Rates Will Rise

Auto loan interest rates will continue to rise in 2023, contributing to a growing affordability problem in auto retail, especially for consumers with subprime credit, predict analysts at Bankrate.

“For most car buyers – those with average or better credit – rates will remain below 7% on new car loans and below 8% on used car loans,” Greg McBride, chief financial analyst at Bankrate tells Wards. “But consumers with weaker credit profiles will have much different experiences, as credit tightens and rates reach well into double digits.”

McBride notes that interest rates are only part of the affordability problem keeping some shoppers out of the market. He notes the predominant factors driving up monthly payments include low OEM incentives, dealer discounts, low inventory, and high demand.

In addition, customers are buying larger vehicles with a high amount of standard and optional equipment, driving up average transaction prices.

According to Experian Automotive, the average new-vehicle amount borrowed in the third quarter of 2020 is $41,665, up about 10.4% vs. a year ago. On used-vehicle loans in the third quarter, the average amount borrowed is $28,506, up about 8.6%.

Still, interest rates contribute to the affordability issue. Bankrate expects interest rates on 60-month, new-vehicle loans to reach an average of 6.9% in 2023 and 48-month, used-vehicle loans to reach 7.75%.

To put that in context, in January 2022, 60-month, new-vehicle loans were around 3.86% a year ago, and 48-month, used-vehicle loans were at 4.44% a year ago, according to Bankrate. Bankrate.com aggregates rate information from over 4,800 lending institutions on more than 300 financial products, not just auto loans.

Auto loan interest rates are already far higher for borrowers with subprime credit. According to Experian Automotive, for subprime auto loans, defined as credit scores from 600 to 501, the average is 10.11% in the third quarter of 2022. Deep subprime auto loans, at credit scores 500 and below, averaged 12.93% in the third quarter.