Car prices dip, but interest rates keep buyers in park

Lately, car buying conditions have become more favorable in some areas. But, many consumers still feel the pinch when it comes to financing, according to Edmunds analysts. 

State of play: Rising new vehicle inventory is pushing average car prices down marginally in most cases, especially as 2025 models start to hit dealer lots. As of June 3, total new vehicle inventory was 2.89 million units, an increase of more than 1 million over the past year, says Cox Automotive. 

To entice car buyers and move this metal, incentives are also making a comeback. The average incentive spend per unit for June is expected to be $2,625, up $889 from June 2023 or 5.3% of MSRP, according to J.D. Power. 

The intrigue: But it may not be enough to get sideline buyers off the bench. Stubbornly high interest rates are preventing many borrowers from benefiting from these conditions. Let’s face it, Americans don’t usually buy their cars with cash.  

Financing trends by the numbers:

• The average new vehicle APR (the yearly rate charged for a loan including interest and fees) rose to 7.3% in Q2 2024 from 7.1% in Q1 2024. Used vehicle APR decreased slightly to 11.5% from 11.7% in Q1 2024 but increased from 11% in Q2 2023.

• New car loan terms averaged 69 months with monthly payments reaching $740, up from $735 in Q1 2024. Used car loan terms averaged 69.7 months with monthly payments of $552, up from $546 in Q1 2024.

• Average new vehicle down payments dropped to $6,579 from $6,682 in Q1, while the amount financed rose to $40,873, over $400 more than in Q1. For used cars, the average down payment was $4,140, with the amount financed at $28,166, up from $27,774 in Q1 but down from $29,665 this time a year ago.

Market outlook: Vehicle prices have steadied through late 2023 and early 2024. But, high auto loan rates are expected to linger, according to Bankrate Chief Financial Analyst Greg McBride.

Borrowers with strong credit may find more competitive rates. Yet, consumers with a non-prime credit score or lower ( FICO <660) won't be as fortunate.

According to Experian:

• Near prime borrowers (FICO 601-660) face steep car loan rates, averaging 9.62% for new vehicles and 13.72% for used ones.

• For subprime borrowers (FICO 501-600), the financial burden increases substantially with rates of 12.85% for new cars and 18.97% for used.

• Deep subprime borrowers (FICO 300-500) bear the highest costs, with staggering rates of 15.62% for new cars and 21.57% for used vehicles.

Even super-prime, prime+, and near-prime consumers (FICO 661-850) are choosing to lease more often than in years past, likely to keep monthly payments lower.

What's more: The Fed’s stance on interest rates continues to make auto loans expensive. In late May, the Fed said it won't cut interest rates until it has "greater confidence" that consumer price increases will slow to a 2% target. The central bank has kept its key rate at a two-decade high of roughly 5.3% since last August.

Bottom line: While car buying is getting easier in some aspects, the high cost of financing continues to be a hurdle for many consumers. As the Fed maintains its tight grip on interest rates, it might be a long road ahead before buyers find meaningful relief.

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