What happens in the car market when interest rates fall? New data shows sales are growing and discounts and promotional finance offers have improved. However, better deals on new cars are also helping to lower the resale value of used cars, and the number of former buyers owing more on loans than their car is worth has also risen sharply.
New cars are selling more expensive than a year ago, by about 6%. This suggests the market has become more consumer-friendly, according to a new report from JD Power.
The Federal Reserve’s September interest rate cut led to improved auto loan financing. The average interest rate on a new car purchase in October is expected to be around 6.7%. That would be a decline of about two-thirds of a percentage point from last year, the report said. Dozens of cars are even eligible for coveted 0% APR financing, provided the buyer’s credit is in good shape.
The Fed’s actions are not the only thing that is currently leading to lower vehicle financing rates. There is also the effect of what the auto industry calls “overstocking,” such as an oversupply of new cars on dealer lots. After years of car demand outstripping supply, the balance is back to normal, with new car inventories up 25% from last year. Cox Automotive says dealerships could become more crowded now that 2025 model year vehicles are starting to arrive at dealerships that are still stuck with some 2024 models.
All this helps to offer customers better deals. For example, incentives on new cars average about $3,500, or about 7.3% of the vehicle’s cost, up from just under 5% a year ago. For about 20 different models, those discounts add up to at least $5,000 or so, according to tracking site RealCarTips.com.
Problems of reducing car prices
Car prices are falling; The average new car now sells for $44,904, which represents a decrease of $739 compared to October 2023. recent years.
Nissan is one of the exceptions to this more expensive trend. The company offers three 2025 models priced under $22,000, including the Versa, a compact sedan that starts at $17,190 for the manual transmission version.
The legacy of prices that were even higher than they are today is one reason for the growing number of people with older cars who are “underwater” on their loans, meaning they owe more on the loan than the car is currently worth. According to a recent Edmunds report, the share of used vehicles with “negative equity” has risen to about one in four dealer-turned-in vehicles, up a third from a year ago.
But according to Edmunds, it’s not just the number of such consumers that is causing concern, but also the size of their debt. The company says the five-digit percentage of owners underwater is “alarming.” More than 1 in 5 consumers with negative equity owe more than $10,000 on an auto loan, and about a third of those people (7.5%) owe at least $15,000.
These buyers experienced a double price hit. Many overpaid list prices during the pandemic when prices soared and are now suffering from declining used car values. The average used car price is about $28,800, down 4.8% from a year ago, according to Cars Commerce.
Not that used cars are necessarily much more affordable than new models when financing costs are taken into account. Used car loan rates still average around 11%, much higher than typical rates for new cars, and there are fewer incentives than when people buy a new car.
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