Inflation doesn't make it harder to get an auto loan in every situation. However, as a bad credit borrower, those rising costs can make loans more difficult to qualify for. Here's what you need to know about inflation and auto loans.
What is inflation? Inflation is the decline of a currency's purchasing power. It presents itself as rising prices on goods and services, which means your dollar doesn't go as far. Last year, prices rose on many things, including used cars, leading to a 7% hike in the Consumer Price Index (CPI) – the biggest 12 month gain since 1982. This means your dollar is worth 7% less than it was a year ago.
How inflation impacts auto loans. When costs are skyrocketing, it can make qualifying for an auto loan difficult for people in lower credit score situations. With less buying power, borrowers are forced to look at vehicles that they may have passed over for a more reliable model in the past. Now, those more reliable, newer vehicles may be just out of reach. This is especially true for borrowers with bad credit – those with scores below 670.
One thing that helps to drive this is that the borrowers who can afford to pay more for vehicles are willing to do so. In early 2021, around 40% of customers were comfortable paying up to 12% more to get the car they want, according to a study from Car and Driver. With new and used car prices on the rise, that's around $5,000 more. Not all borrowers are willing, or able to do this though.
Tips for battling inflation on vehicles. So, what do you do as a car buyer when your dollar doesn't go as far as it used to? Here are a few tips to use to make the most of your car-buying situation.
- Buy a CPO used vehicle. If you can't afford that new car you were hoping for, looking for a certified pre-owned model may be just the ticket. These vehicles cost less than their new siblings and can represent a significant upgrade over a standard used car. CPOs may be available with special incentives that aren't found on as-is used cars.
- Look for a model that holds value. Some makes and models are known for being more reliable and longer-lasting. If you're buying used, and a CPO is just out of reach, strive for a car that has top consumer ratings such as Subaru, Toyota, and Honda.
- Buy what you need, not what you want. Getting everything you want in a car is certainly the goal, but when it comes right down to it, finding a base model vehicle without all the bells and whistles might make it more affordable.
Our take. Though inflation is no fun for anyone, it's not something that's going to be corrected overnight, and with more and more buyers willing to pay more for cars, some borrowers may start to feel the strain. If you can't beat the inflationary game, make sure you're prepared as possible to take on your next loan, even if it's a bad credit one.
To help ease the burden of finding a lender, CarsDirect has gathered a coast-to-coast network of special finance dealerships that are signed up with subprime lenders to help borrowers in many challenging credit situations. Let us help you get connected to one. Simply fill out our fast, free, auto loan request form to get started.