Car shoppers face a costly squeeze of high prices and high interest rates

Car purchases have become more expensive, and many buyers are trying to soften the blow by choosing longer loan terms to keep monthly payments down.

However, stretching financing to seven years or longer can add thousands of dollars in extra interest and make it tougher to trade in or sell the vehicle later.

“You don't want to extend out how long you're paying for it because you'll be paying thousands upon thousands of dollars extra in interest,” said Ray Shefska, co-founder of CarEdge.

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For first-time buyer Allyra Spoerl, finding an affordable car meant carefully comparing every option.

“I'm looking at a 2025 Hyundai Elantra or maybe a new one,” she said while shopping for her next vehicle.

Her experience reflects a wider trend as Americans contend with both elevated vehicle prices and higher borrowing costs.

“The big thing that sticks out to a lot of clients is that average rates right now through your credit unions can run as high as 7% or 8%,” said Travis Wheeler, a general manager of Jeff Wyler Hyundai.

Record payments, longer loans

Vehicle prices remain close to record levels.

According to Kelley Blue Book, the average new vehicle sold for $50,562 in September, just $52 shy of the all-time high.

At the same time, the average monthly payment for a new car hit a record $787, pushing many buyers to extend financing terms farther than ever.

Edmunds reports that one in four buyers is now taking out loans lasting 84 months or more.

Longer loan terms can lower a monthly bill, but they can also create problems such as negative equity, which can become an issue if a buyer wants to trade in the vehicle before the loan is paid off.

“They won't be able to because there'll be so much negative equity associated with all that extra interest they're paying,” Shefska said.

And if the truck, car or SUV needs a major repair, it may already be outside the warranty period.

“Most folks won't have the money it takes to take care of that repair along with taking care of the car payment,” Shefska added.

Could a new car be the better deal?

Many shoppers assume a used car is always the less expensive choice, but that is not always true in the current market.

Some automakers are offering promotional financing on new vehicles that can make them cheaper than lightly used models.

“Hyundai offers several models that have 0% for 60 months, 1.9% for 72, including rates as low as 3% on some of our introductory models,” Wheeler said.

Dealers are also marking down some leftover inventory as the year winds down.

“Historically, automakers tend to offer the largest incentives to customers to help them buy cars in November and December,” Shefska said. “And dealerships are highly motivated to sell cars to hit sales goals.”

Used-car prices remain elevated as well. The average used vehicle was listed at $27,235 in September, the highest average since late 2022.

“Since COVID, there was a lack of pre-owned inventory available, so right now pre-owned prices are definitely higher than they typically would be,” Wheeler said.

Even with possible financing deals, a brand-new car can still be out of reach for many shoppers. Experts say the key is to separate what you want from what you actually need.

“Because the truth of the matter is — what you need typically is considerably less expensive than what you want,” Shefska said.

Tips for car buyers

Whether shopping for a new or used vehicle, experts recommend getting pre-approved for financing before going to a dealership.

Knowing your borrowing costs in advance can help you compare offers and avoid taking on a payment that would strain your budget.

“Then absolutely refuse to look at anything that is beyond what it is that you can afford,” Shefska said.

For Spoerl, the final decision pointed to a new vehicle because of manufacturer incentives, warranty coverage and a lower interest rate.

In today’s market, experts say shoppers should compare new and used options carefully while also looking for low-rate financing, rebates and year-end discounts that can reduce the total cost of ownership and help avoid wasting money.

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