Car Deals Are Easier to Find but Lenders Are Tightening Their Terms

New cars are more available this spring, and manufacturers have even begun offering deals to entice buyers.

But at the same time, lenders have been tightening the terms of car loans as they deal with a rising number of delinquencies. That has made it harder for some people to get affordable loans.

Access to auto loans for both new and used cars was generally worse in January than in December and down year over year, according to Dealertrack, a Cox Automotive service that tracks credit availability based on factors like loan approvals, terms and down payments. The impact was seen at banks, credit unions and dealerships.

“We are seeing credit access tighten in all channels,” said Sean Tucker, a senior editor at Kelley Blue Book, Cox’s car research and sales website.

Subprime borrowers in particular — consumers with the lowest credit scores — may face challenges finding financing, Mr. Tucker said. The share of subprime new-car loans has fallen to about 6 percent, roughly half what it was before the pandemic.

Borrowers with strong credit are especially attractive to lenders. The average credit score for new-car shoppers taking out a loan or lease rose to 743 at the end of 2023, up from 739 a year earlier, according to fourth-quarter data from Experian Automotive, which tracks car financing. For used cars, the average score was 684, up from 681. (Experian’s report uses VantageScore 3.0 scores, ranging from 300 to 850; scores of 661 and above generally are eligible for favorable terms.)

People are becoming delinquent on car loans (and credit cards) at higher rates than before the pandemic, according to the Federal Reserve Bank of New York’s February report on household debt and credit in the fourth quarter of 2023.

“This signals increased financial stress, especially among younger and lower-income households,” Wilbert van der Klaauw, economic research adviser at the New York Fed, said in a statement about the findings.

Delinquency rates for all types of consumer debt fell during the depths of the pandemic, 2020 and 2021, the Fed’s report said, but have been rising as savings from stimulus aid dwindles and the pauses on mortgages and student loan payments have expired.

Auto loans secured in 2022 and 2023 are so far having more problems than earlier loans, “perhaps because buyers during those years faced higher car prices and may have been pressed to borrow more and at higher interest rates,” New York Fed researchers said in a blog post. Interest rates on car loans are influenced by the Federal Reserve’s benchmark rate, and that has risen during the Fed’s campaign against high inflation.

While both car prices and average loan amounts have started to decline over the last year, monthly payments have not, partly because of higher interest rates on auto loans, according to Experian. The average monthly loan payment for a new vehicle at the end of last year was $738, up from $720 in 2022. The average for a used vehicle was $532, up slightly from $530.

The average interest rate on a loan for a new car was 7.18 percent at the end of 2023, up from 6.08 percent in 2022, Experian said.

Interest rates may be affecting down payments. Heading into 2020, a 10 percent down payment was typical. But it has been rising and has been hovering close to 15 percent in recent months — probably because buyers are trying to lower their monthly payments, according to Cox Automotive.

With the inventory of new cars plentiful, dealers have started to offer incentives, like cash-back rebates. Dealers typically like a 60-day supply of cars on hand, but the average is now about 80 days, Mr. Tucker said. That means manufacturers may offer deals to help move vehicles off sales lots. “Supply is outstanding,” he said, in contrast with shortages that drove up prices during the pandemic.

Used-car shoppers, however, may find that while prices have stabilized, “they’re still quite high,” said Benjamin Preston, an auto writer for Consumer Reports.

There’s an argument to be made for waiting a bit, if you don’t need to buy a car immediately. Carmakers that emphasized more profitable, high-end models with luxury features during the pandemic are expected to begin ramping up production of more affordable cars in the coming months, Mr. Tucker said. And the Fed has signaled that it may cut rates sometime this year, which may make loans more affordable.

Lower interest rates can be found now — if you have top-tier credit and can manage a shorter loan term, which means higher monthly payments, said Rod Griffin, senior director of public education and advocacy at Experian. (Longer-term loans — those stretching six to seven years — had average interest rates around 9 percent, Experian found.)

Recently, Honda was offering 2.9 percent financing, with a 36-month term, on Honda CR-Vs; Subaru offered 1.9 percent with a 48-month loan, on Outbacks.

Here are some questions and answers about car shopping:

How can I prepare to shop for a car?

Prepare early, Mr. Griffin advised — at least six months before you plan to buy. Check your free credit report and, ideally your credit score. (Before paying for a score, ask your credit card company or lender. Many provide them free to their customers). Take any steps you can — like paying bills on time — to improve your profile.

Then, shop for your loan and your car separately, Mr. Tucker said. Get preapproved by your bank or credit union, and take that offer with you to the dealer, to see if they can beat it.

Is there a new rule governing car purchases?

Yes, but it hasn’t taken effect yet. The Federal Trade Commission last year finalized its CARS rule, for Combating Auto Retail Scams, aimed at protecting car shoppers from hidden fees and bait-and-switch pricing tactics. The commission said the rule would make it easier to shop around based on a car’s actual price and would save buyers an estimated $3.4 billion a year.

The rule was to debut in late July, but the agency postponed it, pending the outcome of a legal challenge by industry groups. “We continue to believe the rule is unnecessary, redundant, confusing and will needlessly lengthen the car sales process for consumers,” the National Automobile Dealers Association, one of the rule’s opponents, said in a statement.

What if I can’t afford to pay my car loan?

The Federal Trade Commission recommends contacting your lender right away. Some lenders may agree to work with you if you can continue making payments, even if they’re late.

If you don’t pay, the lender may repossess your car. You may owe any difference between what your lender gets from selling the car and what you still owe on it, as well as fees related to the repossession. Plus, having a lender take back the vehicle could make it harder and more expensive to get credit in the future. Know your rights, which vary by state. Contact your state attorney general’s office.