The Least Bad Way to Buy a Car Right Now
There has never been a worse time to buy a car. More new cars are available now than a year ago, according to Consumer Reports , but prices continue to rise because production favors more expensive models. The used car market is just as bleak: prices dropped in December 2022, everyone rushed to take advantage of the price drop in January, and now used car prices have shot up again .
New and used cars are more expensive
The gold standard for buying a car is still cash and in full – the exact opposite of this – signing a lease. ( Whatever you do, never rent a car if you can avoid it.) That leaves most buyers with one option: getting a car loan. But with interest rates and list prices continuing to rise without end, financing a car costs a lot more than it did a few years ago.
Interest rates on used car loans are initially higher than on new car loans, and both are only getting higher: according to the Kelley Blue Book, as of January 2023, the average rate on new loans was 8.41%, and the average rate for used cars – 12.88%. . (A year ago, those numbers were 5.3% and 9.4%, respectively.) When you consider that the average price of a new car is almost $50,000 and the average price of a used car is still almost $30,000 , it’s easy to get frustrated.
Whether you’re looking for a new or used car, it can feel like you’re screwed up no matter what you do, and in a way, you’re right. There is currently no good (read: cheap) way to buy a car, but if you absolutely must, some financing options are better than others.
Least Bad: Taking a Credit Union Loan
Credit unions offer auto loans at significantly lower rates than banks and often at lower rates than dealerships, although some dealers offer comparable rates specifically to compete with credit unions. The downside is that credit unions are only members and may have stricter credit rating requirements than other funding options. (A credit union won’t penalize you for a low credit score with an exorbitantly high interest rate, but if your score isn’t high enough, you won’t qualify for a loan at all.) Your local credit union can offer a great benchmark for comparing purchases, especially if you’re already using one.
A little worse, but probably good: a bank loan
Getting a car loan from a bank has the same pros and cons as getting a loan from a credit union, but with slightly less attractive interest rates. Banks tend to be a little more “forgiving” to borrowers with low credit scores, which can be helpful, but they expect to be penalized by a higher interest rate.
Riskiest: Dealer Financing
Financing your car purchase through a reputable dealer can be an attractive option. The one-stop-shop aspect is convenient, and if you have a strong negotiating position—like a perfect credit record or the ability to make a solid down payment—you can negotiate a better deal than a traditional one. loan from a bank or credit union. But unscrupulous car dealers often engage in predatory lending practices that make buying a car even more expensive than it actually is, especially for people who really need the car and don’t have the financial clout to toss around.
Interest rates on dealer loans vary by region, but are generally higher than those of banks and credit unions. Depending on your financial situation, this may already be an obstacle to a deal. But higher rates aren’t the only reason to be careful with dealer credit. A recent NPR article describes the practice of selling “yo-yo” cars , where the dealer refuses what the buyer thought was a completed sale. The story follows a rural Florida couple who traded in their old car for a new model, only to get a call from the dealer three weeks later saying that funding had “fallen off” and they had to sign a new contract with worse terms. if they want to keep their car. And they had already sold the trade-in, so they couldn’t get their old car back either.
This happens more often than you might think—NPR interviewed about 40 lawyers who collectively said they received calls from 900 buyers in the last year alone about selling yo-yos—and it has devastating consequences. Besides, this is just the latest example of the nasty tricks car dealers pull to get you to sign a contract.
Ultimately, the best way to protect yourself as a potential buyer is to go shopping and read every scrap of fine print before signing anything, especially if you’re thinking about going down the dealer financing route. Now might not be the best time to buy a car, but with a little extra research and vigilance, you should be able to find one that’s right for you.