Cost to finance a new car hits a record $656 per month — and auto shoppers could pay even more with latest Fed rate hike

For consumers in search of an affordable new car, there’s little relief on the horizon.

The monthly costs to finance a vehicle purchase have hit record highs. Consumers face monthly payments averaging $656 for a new car, financed at 5.1% over 70.5 months (nearly six years), according to May data from Edmunds.com. For used cars, the average monthly payment is $546, with an average rate of 8.2% and loan length of 70.8 months (again, just under six years).

It’s likely to get even pricier. With the Federal Reserve boosting a key interest rate by 0.75 percentage points on Wednesday, borrowing costs are poised to head higher on a variety of consumer loans — including those for autos. Coupled with elevated prices for both new and used cars and limited inventory due to supply-chain challenges, the market isn’t expected to improve anytime soon.

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“Simply put, there is not enough supply of sellable vehicles to support demand,” said Jeff Schuster, LMC Automotive’s president of Americas operations and global vehicle forecasts, in a forecast published jointly with J.D. Power.

In addition to a persisting shortage of computer chips — key components needed for today’s cars to operate — manufacturers face additional supply-chain risks, including the ongoing war in Ukraine and Covid-related lockdowns in China, Schuster said.

New car prices are up 12.6% from a year ago and used car prices are up 16.1%, according to the latest data from the U.S. Bureau of Labor Statistics.

While those year-over-year increases have slowed somewhat, higher interest rates are pushing up the cost of financing a car. The Fed indicated on Wednesday that another hike is likely at its July meeting.

For new cars, the average transaction price was an estimated $44,832 in May, according to the J.D. Power/LMC Automotive forecast. For used cars, consumers are paying an average $31,450, according to CoPilot, a car shopping app.

An affordability index published by Cox Automotive and Moody’s Analytics shows that the number of median weeks of income needed to purchase a new car rose to 41.3 weeks in May from 40.8 weeks in April — and up from about 35 weeks a year earlier.

While current market conditions aren’t favorable for car buyers, there are ways to try bringing the cost of a new or used auto down. Here are some tips from Edmunds:

• Know your trade-in value. The extra equity from a trade-in is your biggest negotiating tool in today’s market.
• Know your pre-approved interest rate (i.e., from a credit union or bank). Even if you have excellent credit, it’s good to get pre-approved for a loan and know what interest rate you qualify for — which helps determine how much car you can actually afford — and then see if a dealership will match or beat the rate you can get elsewhere.
• Know your overall budget. With prices and interest rates heading higher, you may not be able to afford as much car as you think. Consider costs aside from monthly payments, including depreciation, taxes, fees, fuel, maintenance and repairs.