Are you considering a car purchase but feeling uneasy about rising interest rates? Whether you have credit issues that make it challenging to get the car of your dreams or want to know what is financially possible when purchasing a vehicle, this Credit Capitol guide will tell you everything you need to know. Among many other things, we’ll discuss how interest rates are impacting car buying and how to find a vehicle that fits your needs and budget. Let’s get you on the road in a reliable car you can afford!
What Impact Have Interest Rates and Inflation Had on Car Buying?
Purchasing a car is a significant investment. Besides, with the added uncertainty and inflationary pressures in the economy, buyers have had to be mindful of the impact of interest rates and inflation on car buying. Well into the second half of 2023, assessing your buying power and educating yourself on how interest rates and inflation affect your car purchase is critical.
Higher Interest Rates Limit Who Can Purchase a Vehicle
Higher interest means that the cost of borrowing money becomes more expensive. As a result, monthly payments become larger, making cars less affordable for many buyers with limited budgets. This is because the rate assigned by a lender can affect the total cost of a vehicle. For instance, a 5% car loan rate (which was once quite common) can save a buyer thousands of dollars compared to the 11 – 22% rates that we see today.
Higher interest rates not only impact monthly payments; they also determine the amount consumers can finance for their new car. If a car loan is $25,000, it’s harder to finance when interest rates are high. Higher interest rates reduce a person’s buying power and the range of the car they can afford. Even if you’re approved for financing a car purchase, the cost of the loan’s interest can quickly add up and eat into your budget.
Why Do the Feds Hike Interest Rates?
The feds are responsible for monitoring and adjusting the interest rates to accelerate economic growth, maintain the value of the USD, monitor inflation, and provide stability. However, when inflationary pressures exceed the Fed’s official target of 5.00 to 5.25%, they may decide to launch rate hikes to ease the pressure.
Interest rate hikes increase the cost of borrowing, which leads to decreased demand and slowing economic activities. The goal is to prevent inflation from spiraling out of control, as it did in previous decades.
How Can You Buy a Car Even With High-Interest Rates?
Fortunately, there are still ways to purchase a car despite skyrocketing interest rates. One way to reduce your burden is to get pre-approved before going to the dealership. Being pre-approved means you’re familiar with the loan terms and can budget accordingly to avoid acquiring an expensive loan.
Also, consider shopping for used cars or those already on the lot since they typically have lower interest rates. Most car dealerships have financing options available to consumers.
You might look for options that offer extended loan terms to reduce your monthly payments; this can help you spread your purchase over a longer period. Keep in mind that the longer the loan term, the higher the interest charge will accumulate. If you take this route, be mindful that it can be costly over the long term. Make a budget before depending on extended repayment periods.
Interest rates significantly impact car buying due to the high cost of borrowing, monthly payments, and the range of vehicles available. But that doesn’t mean you can’t purchase a car in 2023. Take necessary steps such as getting pre-approved for a loan, avoiding acquiring extended repayment periods, and shopping for cars with lower interest rates. Do your research and budget accordingly!
Deciding Whether To Buy New or Used
There are several factors to consider when determining what kind of vehicle to buy. You essentially have three options:
- Buy a new car.
- Buy a used car.
- Pay to have your current car serviced.
Buying a new car is more expensive than buying a comparable used car, but it can yield several significant advantages. New cars usually come with a warranty covering any defects or repairs for a specific period while many used cars don’t have a warranty. Thus, you can avoid paying for unexpected repairs.
Further, a new vehicle will likely be more fuel-efficient, have modern safety features, and often provide a better driving experience. And many new models can be customized with your desired options and features.
Buying a used car can give you fantastic value in the current market, as their prices are generally lower than those of new cars. Even with a higher interest rate on financing, you can secure a lower price tag for a used model.
Some car models that are several years old may still be very reliable and have nearly all the same features as a newer model. Purchasing a used car can be the ideal choice if you want to save money and don’t need (or want) all the bells and whistles that come with a 2023 model.
Servicing Your Car
One other strategy to consider is keeping your current car and taking it in for regular servicing. Maintenance can extend its lifespan, ensure that it remains reliable on the road, and minimize costly repairs. Some simple ways to keep your vehicle in good shape include:
- Regularly check your oil and other fluids, and replace them if necessary.
- Keep up with scheduled maintenance such as tire rotation, brake pad replacement, and filter changes.
- Ensure your lights are working correctly to increase visibility when driving at night.
- Don’t procrastinate on making repairs that can help you avoid bigger repairs down the road (that alignment isn’t going to fix itself!).
Cash vs. Financing
When it comes to making large purchases, such as buying a car, many people must decide whether to pay in cash or finance the purchase with a loan. Cash offers the benefit of no debt and potentially lower overall costs due to not paying interest. That said, financing allows you more flexibility with payments and the ability to diversify your investments with the money you would have used to make the purchase.
Deciding between the two options is a personal and financial decision you must consider carefully. It ultimately depends on your circumstances and goals.
Paying Cash for a Vehicle
Paying cash for a vehicle is ideal if your goal is to pay as little as possible in the long run while coming out debt-free (at least in terms of your new car purchase). You can save money on interest payments if you can pay in full, and you can keep the full amount of the vehicle’s value in your pocket rather than owing part of it to a third-party lender.
Buying a car with cash will let you shop for deals without worrying about a loan limit or interest rate. It can also help build your credit score since lenders and creditors love to see timely payments on large purchases.
Financing for a Vehicle
On the other hand, financing can offer flexibility with payments and allow you to make larger purchases than your current budget might allow. Financing a car purchase means you can spread the vehicle’s cost over time and manage your monthly cash flow more effectively.
Financing also provides an opportunity to diversify investments by freeing up your funds for investment opportunities. A successful auto loan repayment history can help build your credit score, but be aware that financing any purchase comes with interest costs that can add up significantly over time.
Credit Capitol is an excellent choice for financing your car, especially when dealing with credit issues. We specialize in helping people secure auto loans tailored to their budgets and needs. Not only will we help you secure a loan that works for you — we’ll also help you find the ideal vehicle. With Credit Capitol, you get a comprehensive service that makes owning a car smoother and more accessible, even if your credit is “less than perfect.”
Should You Buy New or Used With the Current Interest Rates?
This all depends on your current financial situation, goals, and lifestyle. Ultimately, you should consider your budget and plan accordingly before committing.
Be sure to compare different loan offers and shop around for the best rates, taking into account fees and other costs like insurance. Also, it’s crucial to establish a reasonable biannual or annual budget to confirm that you can make payments on time.
For example, if you have a steady income and cash in the bank but want to save money on interest rates, buying new may be your best bet as it offers more options for customization. Alternatively, you might choose a used vehicle if you’re looking for a cheaper option and don’t need all the niceties of a 2023 car.
It’s also crucial to use reliable resources while researching, such as financial advisors and comparison websites, to see all the best loan offers available. You may even be able to negotiate a lower interest rate if you’re willing to pay more up front.
Remember that current interest rates are temporary and subject to change in the coming years. Stay on top of market trends and adjust your financial plan accordingly. You’ll be able to find the best loan option for your situation as long as you have the right information!
Is Now a Good Time To Purchase?
Although interest rates have increased significantly, there are still plenty of ways to make a smart purchase. Buy from a reliable dealership or private owner, and take advantage of incentives and special offers. If you have good credit and can secure a loan with an affordable interest rate, buying a new one may be your best option.
Just be intentional to weigh the pros and cons of each option before making a final decision. With some research and smart money management, you can ensure you’re getting a great deal no matter the route you take.
The Bottom Line
Due to inflation and skyrocketing interest rates, buying a car in 2023 looks much different than it did just a few years ago. Financing is more expensive in most cases, so paying cash might be the best option if you have the funds available. But you can still find good deals on new or used models — despite higher interest rates — with careful research and comparison shopping.
Reliable resources like Credit Capitol can help you secure an auto loan tailored to your budget and needs, regardless of your credit history. Connect with us to learn about our process, and you’ll be driving away in the perfect car in no time!