Should you buy a car now or wait for interest rates to drop?

Nov 21, 2022
couple car shopping at dealership, blue car, the police credit union

The Police Credit Union has various vehicle loan options for you or your family members.


Apply Now 

If you’re in the market for a new or used vehicle in the fall of 2022, you’re far from alone if the changing conditions of the market have you perplexed. New data suggests we may have turned the corner on the record-low inventory levels that disrupted the auto industry and resulted in soaring prices on both new and used vehicles earlier in the year. On the other hand, analysts have cautioned that this gradual recovery does not necessarily indicate an eventual return to pre-pandemic prices, and this isn’t merely a factor of the 40-year inflation high.

Sources including Kelley Blue Book have suggested that automakers and dealer groups might have gotten conditioned to the savings and larger profit margins they’ve enjoyed by operating with tighter inventories. Some manufacturers and dealerships have even acknowledged that they intend to keep the supply of vehicles lower indefinitely, making a return to normal conditions far from assured, at least in the near term.

But of course, buying a vehicle is often not quite as simple as finding the vehicle you want at the best price. Unless you plan to buy the car outright with cash, financing is a major consideration when it comes to a car’s affordability. Ultimately, the annual percentage rate (APR) you pay to borrow money to buy the car will add to your costs, impacting both your monthly payment and the total amount of money you pay in financing charges and fees. With today’s car prices, even a small percentage point difference can easily mean the difference of several thousands of dollars saved or lost.

In an economic climate of rising interest rates, you may be wondering whether it makes sense to buy a car now, or hold onto your current vehicle until the central bank lowers the rates. Here’s what you need to know to make a decision that’s comfortable for you, along with some strategies to maximize your chances of getting a great deal despite whatever actions the Federal Reserve takes in the months ahead:

You can still get a favorable rate on a car loan if you have a high credit score credit

While there are far fewer zero-interest financing deals to be found after the latest series of interest rate hikes, Edmunds.com assures those with good credit that rising interest rates won’t change the playing field all that much for them. If you have a high credit score, it should still be easy to get approved for a good rate, although it may not be quite as low as one you could get in a looser credit environment.

While what is considered a high credit score for an auto loan varies depending on the lender, it can be helpful to keep in mind that FICO® Score ranges from 300 to 850. Under this scoring model, your credit could be considered good from 670-739, and anything above this number would fall under the “very good” (740-799) to “exceptional” (800-850) credit tier. For a more comprehensive understanding, check out “What Credit Score Do I Need for an Auto Loan” from Experian.

Those with lower credit scores will pay a significantly higher APR — often making it necessary to finance a vehicle over a longer time frame, or buy a less expensive model.

Lenders charge higher rates for those with lower credit scores to protect against losses in the event the borrower defaults. Essentially, they reduce their risks by getting more of their money back sooner in the repayment process.

As vehicles have gotten more expensive over recent years, consumers have found it necessary take out larger-sized loans, unless they have the cash to make a larger upfront payment. But making a bigger car payment each month is not always a viable option, especially if you have other significant outstanding debt or your income won’t support it. To make up the difference, more people are having to take out longer-term loans, allowing them stretch out their payments so that their monthly payments become more manageable. Loan terms of 72 months to 84 months are no longer uncommon, and according to Edmunds.com, the average is about 70 months.

Although longer-term loans can help to get you into a car that you couldn’t otherwise purchase by lowering your monthly payments, extending payments over a longer time frame will also increase your interest and finance charges, so you’ll end up paying more for the car overall. In addition, many lenders actually increase the interest rate percentage you pay as the length of the loan term increases. Moreover, it will take longer to gain equity in a car that is financed with a longer-term loan, which can create the added financial risk of being upside on your loan (owing more on your loan than the car is worth). Being under water on an auto loan can put you in financial peril for several reasons, which Autotrader.com covers in “Buying a Car: What Term Should Your Loan Be.”

As Autotrader.com tells it, the best approach when it comes to car loans is to go for the shortest term and lowest possible rate, even if it increases your monthly payment and limits your options in terms of a car you can afford. You’ll save yourself thousands of dollars in interest, and pay off your car that much sooner.

More Tips for Buying a New or Used Vehicle When Interest Rates Are Rising

Know the difference between a loan’s interest rate and APR

While people often use the phrases “interest rate” and “annual percentage rate (APR)” interchangeably, knowing that there is a distinction between the two terms can save you substantial money on an auto loan. The interest rate tells you the cost you’ll pay to borrow money every year expressed as a percentage of the principal (what you borrow). On the other hand, the APR gives you a more accurate understanding of the total cost of the loan because it factors in both the interest rate as well as fees.

Don’t overlook a certified pre-owned vehicle

A certified pre-owned vehicle (CPO) offers important advantages, and perhaps even more so in an environment of rising interest rates, since they often come with special financing for qualified buyers. These vehicles look and feel almost new, and have a very low risk of mechanical problems, having been reconditioned, and inspected and certified by a factory-trained mechanic. They’re also late model (no more than 7 years old) and have limited mileage as well as a clean title and history report. Most CPO vehicles also come with a warranty, which varies by manufacturer, as well as 24-hour roadside assistance, towing reimbursement and other potential perks.

Be aware that used cars usually come with higher rates

As Autotrader explains, a used car may sometimes cost you more to buy than a new car with a higher purchase price, simply because lenders charge higher interest rates on used vehicles. There are a few reasons for this, one being that it can be difficult to predict the resale value of a used car, which can be problematic if the car has to be repossessed. To get approved for a loan and make lower monthly payments, Edmunds suggests looking for an older used car if you have poor credit. However, the site also cautions against loans with long terms, since your car could be very outdated by your payoff date. Depending on your circumstances, including the condition of your current vehicle and whether it still provides reliable and safe transportation, it might also be worthwhile to hold off on getting your next car. If you focus on improving your credit score instead, you will likely get a better deal on a car you want a little further down the road. Find some excellent pointers on “How to Increase Your Credit Score” at Debt.org.

Shop your trade-in to different buyers to get the best value for your vehicle — and to substantially offset the cost of the car you’re buying

When you’re ready to replace your vehicle, it’s a good idea to shop your trade-in to different dealers, because many will buy your car without an obligation to use it as credit toward another car. And as Kelley Blue Book has noted, a competitor might be willing to pay more for your current vehicle than the dealership that sells you your next car. But be certain to do plenty of online research to help determine what your car might be worth before you contact dealers to ask them for a quote.

Trade-in values will vary significantly, so it’s helpful to check multiple sites to get a useful range. Just a few to consider are Kelley Blue Book, Edmunds.com, Consumer Reports’ Car Value Estimator, and Autotrader.com. While you can generally get more money for your vehicle if you sell it yourself to a private party versus exchanging it for credit at a dealership, you’ll want to weigh this against potential hassles (e.g., no-shows, buyers who back out, the title transfer) and out-of-pocket expenses, such as advertising, cleanings and fuel for test drives.

Obtain financing before setting foot in the dealership

You can give yourself a major advantage in the car buying process by securing pre-approval on financing before you shop for the vehicle itself. This can reduce your stress levels because you’ll have an estimate of your budget and your loan size. Moreover, pre-approval will enable you to negotiate with more leverage. Be aware that dealerships might offer a lower price on a vehicle with the intent to make a larger profit on financing terms that could be less favorable to you. If you haven’t obtained preapproved  offers from other lenders, the dealership will have less of an incentive to offer you better terms on a loan.

In the final analysis, the best time to buy a car usually comes down to what makes sense for your personal financial situation, and when you need to replace your vehicle. Ultimately, we can’t predict the exact movements of interest rates with any reasonable assurances, so perhaps it’s best not to become overfocused on trying to time the market. Interest rates are no longer at the rock-bottom lows we experienced prior to the coronavirus pandemic, but neither are they anywhere near the record-highs of 1981. The reality is that you can still get a good deal on financing in November 2022 if you have solid credit. In addition, you can save substantial money on your auto loan if you look out for special financing deals, are careful to consider the term length, and ensure that you accurately compare offers from different lenders.

And, if you’re looking for a great deal on a lightly used, pre-owned vehicle but aren’t interested in haggling over prices in the current market conditions, consider joining us for our used auto sale with Enterprise Car Sales from November 25 through December 4, 2022. You can shop in a relaxed, low-pressure environment, and you’ll have peace of mind knowing that every car, truck, SUV and van must pass a rigorous inspection from an ASE-certified technician before being reconditioned as an Enterprise Certified® vehicle.

Visit any California Enterprise Car Sale location, and when you finance your new vehicle with The Police Credit Union, you’ll get a 1.00% APR discount for terms up to 60 months!* Our loans feature 90 days of no payments, the same rates for new and used vehicles, flexible repayment terms, and convenient pay options. Visit us online for details, and get pre-approved before the sale here.

*APR = Annual Percentage Rate. Lowest qualified rate assumes .25% discount for enrollment in automatic payments, 1.00% off current The Police Credit Union rate with a max loan term of 60 months, and <=75%  Loan-to-Value (LTV) for vehicles purchased from November 25th-December 4th, 2022 from Enterprise Car Sales and financed with The Police Credit Union. APR is based on evaluation of credit history, so your rate may  differ. Pricing subject to change at any time. Rates, fees and terms are subject to change at any time, visit our website for current rates at  www.thepolicecu.org. Used vehicles were previously part of the Enterprise rental fleet &/or an affiliated company’s lease fleet or purchased by Enterprise from sources including auto auctions, customer trade-ins or from other sources, with a possible previous use including rental, lease, transportation  net-work company or other use. All vehicle inventory is available by visiting enterprise-carsales.com or a dealership where a Sales Consultant can help you find vehicles available in our nationwide inventory. Delivery of  vehicles outside local area may require transfer fee.

**$50 bonus will be deposited to members account who finance a vehicle with The Police Credit Union through Enterprise Car Sales on November 25th – December 4th, 3-4 weeks after the car sale has ended.

 

Providing Financial Solutions to Take Care of Our Own

  • Accessibility
  • Federally insured by the National Credit Union Administration
  • Equal Housing Opportunity
  • NMLS ID# 409710

APR = "Annual Percentage Rate". Actual APR is based on your credit profile and may be higher than the lowest rate available. Posted rates may include promotional discounts and other terms and conditions. APY = "Annual Percentage Yield". Rates are subject to change without notice.

The Police Credit Union proudly provides banking and loan solutions including checking accounts, credit cards, auto loans and more for police and other law enforcement agencies and their families  in the Bay Area and beyond. Visit us at one of our branches in San Francisco, Pleasanton, San Mateo, San Bruno or Oakland, CA or check if you are eligible for membership and apply online today.

Site Design by ZAG Interactive. © 2019 The Police Credit Union.