Elevated auto loan rates hinder car shoppers in Q1 2024

Analysts say return of incentives not
enough to combat high interest rates

(April 3, 2024) SANTA MONICA, Calif. — Affordability challenges highlighted by stubbornly high interest rates are impeding growth in the new and used car markets, according to the car shopping experts at Edmunds. Tied to wider hurdles from the current high inflationary environment (such as the near-extinction of the $20,000 new vehicle), auto financing is hampered even with the return of new-vehicle incentives.

New data from Edmunds reveals:

    •    Interest rates remained elevated in Q1. The average annual percentage rate (APR) for new vehicles was 7.1% in Q1 2024, marking the fifth consecutive quarter this figure has remained above 7%, while used-vehicle APRs rose one-tenth of a percentage point to 11.7% over Q4 2023.

    •    New-vehicle average monthly payments continued to hover above $730. The figure settled at $735 in Q1, $4 below last quarter. Meanwhile, used-vehicle monthly payments dipped to $546, down from $561 in Q4 2023 and $551 in Q1 2023.

    •    Negative equity continued to climb. The share of new-vehicle purchases involving trade-ins with negative equity rose to roughly one-quarter of all sales, reaching 23.1% in Q1 2024 – up from 18.3% year over year and 14.7% in Q1 2022. The average amount of negative equity on those trade-ins reached an all-time high of $6,167 in Q1 2024

    •    New-car shoppers continued to opt into $1,000+ monthly payments at a significant clip. The share of consumers with new-vehicle monthly payments of $1,000 or more remained above the 17% mark for the fourth straight quarter. The share ticked down to 17.3% in Q1 2024 from the record high of 17.9% in Q4 2023.

“Punxsutawney Phil may have predicted an early spring, but high interest rates continued to cast a dense shadow over the car market in Q1,” said Jessica Caldwell, Edmunds’ head of insights. “Compelling new product launches combined with the reintroduction of incentives and rebounding inventory in the new vehicle market are all positive signs for shoppers, but elevated interest rates have dampened any positive market momentum.

"The resurgence of negative equity is only compounding the affordability challenges, as consumers who regretted their pandemic-induced purchases are now encountering lower-than-expected vehicle values when returning to dealerships for a new purchase.”

To illustrate how negative equity adversely affects car owners who decide to roll the outstanding balance of their car loan into a new car purchase, Edmunds analysts took a closer look at average monthly payments, APRs and loan terms for dealer-financed new vehicle purchases involving a trade-in with negative equity:

    •    In Q1 2024, the average monthly payment for a new vehicle that only included a trade-in with negative equity was $887, together with an average APR of 8.1% and average term length of 75.8 months.

    •    In contrast, new-vehicle sales involving trade-ins with or without negative equity averaged a $736 monthly payment in Q1 2024 with a 7.1% APR for 68 months.

    •    In Q1 2021, the average monthly payment for a new vehicle that only involved a trade-in with negative equity was just $662, with an average 5.9% APR for an average of 76 months.

“The monthly payment might be a tolerable amount, but it’s critical for consumers to consider all elements of their loan when financing a car purchase in 2024,” said Ivan Drury, Edmunds’ director of insights.

“And once you’re locked into a loan, try to avoid the temptation of trading that vehicle in too soon. Factors like gas prices, vehicle maintenance costs and work commute changes may feel like reasons to trade in your keys for a shiny, new ride, but a new high-dollar car payment with a high interest rate tied to existing negative equity should serve as a rationale for pumping the brakes.”