Earlier in May, the Federal Reserve increased interest rates for the 10th consecutive time. The move will likely exacerbate a trend changing the way Americans car shop, as buyers with less-than-ideal credit have been all but squeezed out of the new car market.
Lenders divide buyers with lower credit scores into two categories. The Consumer Financial Protection Bureau describes credit scores from 580 to 619 as “subprime” and those below 580 as “deep subprime.” At the end of the first quarter of 2023, the average interest rate on a new car loan stood at almost 9%. Used car loans were even higher — 14% on average. Rates that high, says Cox Automotive Chief Economist Jonathan Smoke, “have limited who can buy vehicles.”
The same vehicle and loan would be a very different story for a shopper with a subprime credit score. With a typical subprime auto loan rate of 17.9%, the monthly payments on the car, after 10% down, would jump to $983 a month.