The automotive market is witnessing a notable shift as car prices begin to dip, with over a million more units available than last year and increasing incentives for buyers. June saw the average incentive spend per unit rise by $889 compared to the same period last year, making car purchases seemingly more attractive. However, despite these positive changes, financing remains a significant barrier for many potential buyers.

Edmund’s analysts provide a clear picture of the current financing landscape. For new car loans, interest rates have inched up to 7.3% APR in the second quarter of 2024, slightly higher than the 7.1% in the first quarter. Used car loans, while slightly lower at 11.5% from 11.7% in Q1, still exceed last year’s 11% in Q2. The average loan term for new cars is around 69 months, with monthly payments rising to $740 from $735 in Q1. Used car loans average 69.7 months, with payments increasing to $552 from $546 in Q1.

These high financing costs are primarily due to the Federal Reserve’s stance on interest rates. The Fed has maintained its key rate at around 5.3% since last August, the highest in two decades, and indicated that it will not cut rates until it is confident inflation will slow to a 2% target. This policy has kept auto loan rates elevated, making it difficult for many families to afford new or used cars.

Broader inflationary factors also play a role in hamstringing family budgets. The higher cost of living, encompassing everything from groceries to housing, leaves less disposable income for car purchases. Families are finding it challenging to balance essential expenses with the financial commitment of a new car loan.

Automakers are not ignoring these hurdles. In response, they have introduced significant incentives, cash discounts, and attractive lease deals, particularly for electric vehicles. Some manufacturers are even taking additional steps to address high vehicle costs, aiming to make new cars more accessible to buyers.

Despite these efforts, the combination of high interest rates and broader economic pressures means that, for many, the prospect of purchasing a car remains daunting. While car prices are on a downward trend and incentives are on the rise, the financial barriers posed by steep interest rates and the cost of living continue to keep many potential buyers in park.