Four Ways for Millennials to Navigate the Interest-Rate Crunch When Buying a Car

By Christopher Russell

The feeling of driving a new car off the lot is hard to beat. It’s a symbol of independence and a marker of success. However, for millennials, buying a car can be a challenging and expensive endeavor, particularly in today’s market. Rising interest rates are making it increasingly difficult for young buyers to purchase a car without stretching their finances to the limit.

In February 2022, new car buyers with a monthly payment over $1,000 rose to an all-time high of 16.8%, according to Edmunds’ data via Reuters. That is up from 15.7% in the fourth quarter of 2021. While car prices have been leveling off as the supply chain normalizes, interest rates are squeezing buyers’ wallets. Average interest rates on new-car financing rose to 7% in February, and an “ugly” 11.3% on used cars, Edmunds said.

A monthly car payment of more than $1,000 is starting to show its painful effects. The percentage of auto loans transitioning into delinquency (more than 30 days late) has been ticking up for the last three quarters, according to the Household Debt and Credit Report from the New York Fed.

If you’re a millennial struggling to buy a car in the current market, here are four ways to navigate the interest-rate crunch and make your dream of car ownership a reality.

Boost the Down Payment

One obvious way to avoid high-interest-rate hell, if you have the means, is to put down more cash. That is exactly what buyers have been doing. The average down payment in the fourth quarter of 2021 was the highest ever, at $6,780 for new cars and $3,921 for used, Edmunds data showed.

Without extra cash on hand, the temptation is to stretch financing out further and further to minimize the monthly hit.

“I recommend paying cash for a car, or being able to pay off the car in less than three years,” advised Kassi Fetters, a financial planner in Anchorage, Alaska. “If you can’t do this, then you’re reaching for a car outside of what you can afford.”

If you can’t pay cash for a car, consider increasing your down payment. A larger down payment means you’ll be borrowing less money, which can help reduce your monthly payments and minimize the impact of higher interest rates.

Re-Evaluate Your Pre-Order

When the supply chain was clogged up and new cars were scarce during the pandemic, buyers put down deposits with a delivery timeline of many months. Since then, interest rates have spiked, and used cars have become cheaper, so what made sense then may no longer apply.

“For them, it can be a dangerous situation because they are not in control anymore,” said Ivan Drury, Edmunds’ director of insights.

If you can get out of such a pre-order without too much damage – or transfer that deposit over to a more modest purchase, as dealers may allow – it may be worth considering.

Trade Down If Necessary

It could be time to admit that your eyes were bigger than your wallet.

“If you’re already tied up with a large car payment, then I suggest you sell it and get a car you can actually afford,” Fetters said.

If you are swapping out for a more humble ride, look to basic offerings instead of splurging on fully loaded versions with high-end trim. Deals may be found in models that have not been fully redesigned for a few years, or certified pre-owned vehicles which sometimes come with subsidized interest rate offers.

A major roadblock is “negative equity,” meaning you owe more on the car than what it’s worth. When trading down, remember, to be sure you are in a good equity position so that you don’t have to roll the balance over into the next loan. 

PAY MORE ATTENTION TO DEALER INCENTIVES

While interest rates have been rising, automakers and dealerships have been offering more incentives to buyers. These incentives could come in the form of cash rebates, low-interest financing, or lease specials. By paying attention to these deals, you may be able to offset the impact of higher interest rates.

For example, if you were considering buying a new car with a monthly payment of $600, but you can find a dealer incentive that offers 0% financing for 60 months, you could save more than $5,000 in interest charges over the life of the loan. That could reduce your monthly payment by $84, or you could use the savings to pay off your loan faster.

To take advantage of these incentives, you’ll need to do your research. Look online for deals from automakers and local dealerships, and be prepared to negotiate with the salesperson. Don’t be afraid to walk away from a deal if it doesn’t meet your needs.

In conclusion, there are several ways for millennial car buyers to survive the interest-rate crunch. By boosting your down payment, re-evaluating your pre-order, trading down if necessary, and paying attention to dealer incentives, you can make your car-buying experience more affordable and less stressful. Remember, it’s important to stay within your budget and not overextend yourself, even if it means settling for a less expensive car or postponing your purchase until you’re in a better financial position.