According to data released by Experian, the average car loan amount increased by 8.59% in 2022. This increase is lower than the peaks seen during the pandemic – the cost of car loans increased by almost 22% year-on-year in Q3 2020 to Q3 2021 – but could still have a significant impact on consumers looking to finance a car. New or used cars.
There are two main reasons for this increase – rising car prices and high interest rates. Since the Federal Reserve started raising interest rates late last year, interest rates on many different types of loans have gone up. However, there are still huge disparities in the interest rates offered by different auto loan providers, making it more important than ever to do your research.
Car loan amounts increased by 8% in the year 2022
Data released by Experian shows that the cost of borrowing for cars is still rising relatively quickly. In the third quarter of 2022, the average used car loan amount increased by 8.59% compared to the same quarter of 2021. This makes the average car loan worth $28,506 in the third quarter of 2022.
An 8% increase is relatively small compared to the volatility the auto finance market has seen over the past two years. For example, in the third quarter of 2021, the average auto loan size increased by 21.37% year over year. It feels like we’re past the height of the pandemic era, but car finance is getting more and 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 a shortage of semiconductor chips has slowed production of new vehicles. This resulted in many consumers opting to buy used cars, which increased demand and pushed up prices.
The other major factor that increases the average car loan amount is interest rates. Since the Federal Reserve started raising interest rates nearly a year ago, rates on a wide range of loan products have followed suit, including auto loans. Experian found that the average interest rate in Q3 2022 was 5.16% for new car loans and 9.34% for used car loans, a small but significant increase from 4.09% and 8 .12% in 2021.
The combined effect of these factors has raised the cost of a car loan by quite a significant milestone. The median loan amount for a new vehicle also increased to $41,665. Combined with high interest rates, this means that the average new car loan is now over $700 a month.
How to apply for a car loan
For consumers, the rising cost of car loans is making buying even more important. There are four main factors to consider when choosing a car loan. We mentioned two of them above – the total amount you want to borrow and the interest rate the lender charges. 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 an auto loan (and most other forms of consumer credit). The interest rate offered to those with good credit can be much lower than that offered to borrowers with bad or incomplete credit history.
For example, in Q2 2021, borrowers with a credit score of 781 or higher received an APR of 2.34% for new cars and 3.66% for used cars; those with credit scores between 601 and 660 received APRs of 6.61% for new car loans and 10.49% for used ones.
That’s how important your credit score is when it comes to getting a good deal on a car loan; In fact, it’s almost always a good idea to review your credit report and correct any errors before even looking at the credit terms.
Only then should you buy from a variety of lenders including major banks, community banks, credit unions and online lenders. Compare interest rates, terms, credit requirements and other factors that can affect the cost of your loan.