The financial forecast may be on an upswing, but new car prices are as well. Add in the highest interest rates in decades, and it’s no wonder the average payment for a new vehicle is now over $700 a month. Those sky-high payments make it a real stretch for many people to buy a new car. But, our Stephanie Hart is here with auto financial tips to help you make that new car dream come true.

STEPHANIE HART: Given our current economic environment, a solid strategy is crucial in order to help you secure a good car loan. I discussed the situation with Bankrate’s Senior Economic Analyst Mark Hamrick.

MARK HAMRICK: It could be in the coming years that interest rates will be higher for longer, but perhaps not as high as they are right now.

In some cases, financial institutions are going to be a little more stingy with the money they’re lending because they’re worried about whether people can make good on those payments. We have seen lending tightening over the last year or so.

Auto Financing 101

STEPHANIE HART: But don’t panic, deals are out there. You just have to be prepared before you can capitalize on them. After all, buying a car is the second largest purchase you’re going to make behind buying a home. So, before you walk into a dealer showroom like this one, you’ll want to make sure you have done your homework.

First: Create a budget.

Second: Have savings for a down payment.

Lastly, make sure you know your credit score. The higher it is the lower interest rate you will qualify for and the more money you will save.

If you’ve checked off all of those boxes, then you’re ready to shop around for the best auto loan. Start by contacting credit unions, banks and dealerships. Find out what you qualify for, compare rates and learn about what you really can afford.

At MECU credit union in Baltimore, Maryland, auto loans topped the charts as its number one loan product in 2023. As you may know, a credit union is a not-for-profit financial organization that’s owned by members, not shareholders, so profits are returned to members in the form of lower fees, better rates and service.

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ADRIAN JOHNSON: We offer financial wellness, financial literacy, financial education. We have certified financial counselors who will help our members for free– budgeting, savings, improving their credit score. So that’s been a big plus.

STEPHANIE HART: And keep in mind, getting a pre-approval letter from a credit union or bank will always save you money during the auto finance process.

KEITH GROSSNICKLE: We actually love that because that is an enlightened consumer who’s prepared. And we work with them to help get the best rates for them. Sometimes we can actually do better than what they’re already pre-approved for, and if not, we’re ready to put the deal together the way they want.

STEPHANIE HART: And remember, you can typically get a lower interest rate on a new car than you can on a used car because the risk of loss to the bank is lower.

KEITH GROSSNICKLE: The factory uses what is called a subvented rate. That’s where they actually pass the savings through to a consumer. Instead of in the form of a rebate they do it in the form of a lower interest rate.

Auto Financing 101 3

STEPHANIE HART: Whether you choose to finance through a dealership, credit union or bank, don’t rush into anything. And remember, the life of the loan is important. Auto loans with payments of five years or longer have become increasingly common and should be avoided.

MARK HAMRICK: In the early part of the purchasing program you may be underwater. Being underwater on a car payment means that what you owe is more than the value of the car. And guess what? If you’re in an accident and let’s say it’s totaled, you could really be on the hook if you don’t have gap coverage that can make sure that you’re reimbursed for the total cost of the car.

STEPHANIE HART: Even though high sticker prices, combined with high interest rates, have increased the debt-to-income ratio of most borrowers compared to previous years, making it more difficult for some people to qualify for loans, sound financing is still possible…if you’ve done all your homework first.