Why Car Prices and Interest Rates Are Falling, But Your Monthly Payments Aren’t

Nowadays, purchasing a new car in the United States has become an increasingly complex and burdensome endeavor.

Experts point out that the issue extends beyond the initial shock of high prices.

At first glance, the market appears encouraging. For example, automakers like Chevrolet are introducing models such as the Trax subcompact SUV with starting prices around $25,000. Recent trends also show a decline in the average price paid for new cars. Data from Edmunds.com reveals that from January to November 2024, the average price paid was $47,465, down 0.8% from $47,851 over the same period the previous year. However, those who last purchased a vehicle in 2019 might be shocked to find that the average price back then was only $37,310.

Moreover, the Federal Reserve has reduced interest rates, which theoretically makes financing a new vehicle less expensive. Additionally, with more new cars available at dealerships than in past years, automakers are rolling out various incentives.

Despite these factors, affordability remains a significant hurdle for the auto industry in 2025, as observed by industry experts.

“The situation is quite complex,” Tyson Jominy, the vice president of data and analytics at J.D. Power, commented. “We haven’t really tackled the affordability issues in our industry.”

The Affordability Dilemma

The core issue lies in the definition of affordability, which varies greatly beyond the manufacturer’s suggested retail price (MSRP) displayed on the car window.

“Consumers feel the pinch through their monthly payments, which continue to rise, making new cars feel less affordable,” Jominy explained in an interview with the Free Press.

There are several reasons for the increasing monthly payments. For one, the trade-in values are decreasing more quickly than the drop in interest rates for car loans. This means that the amount consumers get from their trade-ins is lower than before, keeping monthly payments high.

“Therefore, it’s not just about MSRP and average transaction prices; it’s really about those monthly payments,” Jominy added.

J.D. Power reports that the average monthly car payment in November 2024 was $740, which is $15 higher than in November 2023 and $150 more than in November 2019. The average annual percentage rate on new car loans was 5.1% in 2019, but had risen to 6.4% by 2024, according to Jominy.

“Typically, it’s $7 for every $500 borrowed,” he noted. “If the transaction price drops by $2,000 as it did from November 2022 to November 2024, then monthly payments should theoretically decrease by $28. However, we saw transaction prices drop by $2,000 while monthly payments actually increased by $24. Clearly, there’s more to it.”

What Can Consumers Do?

Jominy points out that many automakers have raised their MSRP only to counteract these hikes with incentives, which simply negate the increase. This, combined with weaker trade-in values, keeps monthly payments high. Moreover, consumers are generally hesitant to extend their loan terms from, say, 72 months to 84 months, which could lower monthly payments.

“Consumers have few options: either pick a less expensive vehicle or extend the loan term. Yet, we see reluctance in opting for longer loan terms to reduce payments,” Jominy remarked.

Another issue is how the industry defines what is affordable, which often doesn’t align with consumer needs. “If a family needs a three-row crossover, they are not concerned with an entry-level hatchback. They need a vehicle that fits both their needs and their budget in that specific segment,” Jominy explained.

Leasing as an Alternative

During Cox Automotive’s final forecast media briefing of 2024, Senior Economist Charlie Chesbrough highlighted that affordability was a major theme of the year. “Affordability is at the forefront of consumer concerns this year,” he stated.

Chesbrough noted that affordability challenges led to a 19% increase in leasing from January through November 2024 compared to the same period in the previous year. This rise was partly driven by electric vehicles, as automakers apply the $7,500 federal tax incentive to leases of EVs. Additionally, there was a 5% decline in car purchases as more consumers chose leasing, finding it more financially manageable.

“Many are finding the monthly payments for buying too steep and are turning to leasing, which generally has lower monthly payments,” Chesbrough explained.

Furthermore, smaller cars and SUVs saw an increase in market share, while larger vehicles experienced a decline.

“It’s not a coincidence that the vehicles gaining market share this year are those with the lowest price points,” Chesbrough added.

Buy Now or Wait?

Cox experts predict that affordability will improve in 2025, suggesting it could be the best year for the market since 2019. They forecast that new-vehicle sales could reach 16.3 million units, up 3% from 2024. However, they also caution that profitability will remain under pressure. Despite these challenges, a healthy consumer and economic environment are expected to support market growth.

Ivan Drury, director of insights at Edmunds, speculates that buyers who have been waiting might start returning to dealerships. This is based on the observation that the average age of trade-ins has been increasing, with vehicles being 5.7 years old on average in December 2024, up from 4.5 years in December 2021.

Drury highlighted that improved inventory has curbed dealers’ ability to mark up prices above MSRP, which was common during the post-COVID supply chain issues.

“Two major deterrents for consumers are the steep rise in average transaction prices since 2019 and new car interest rates, which are resembling those of used cars. We anticipate further decreases in Fed rates throughout the year,” Drury said.

However, potential buyers might feel compelled to make a purchase sooner if President-elect Donald Trump implements threatened high tariffs on imported vehicles and parts, as this could lead to increased prices passed down to consumers.

“On the other hand, consumers not under immediate pressure might benefit from automakers’ efforts to clear out inventory of outgoing models, potentially kicking off the new year with attractive deals,” Drury added.

Smart Car Buying in 2025

If you decide to buy a new car, there are strategies to ensure you make a wise purchase. Jominy strongly advises against putting any money down on a lease. “If you total your car, the insurance will only cover the value of the vehicle, not your down payment,” he explained. “I never recommend putting money down on a lease.”

Also, it’s worth considering that many new cars come equipped with advanced safety features and technology that, although more expensive, offer greater safety compared to older models.

“There are plenty of good reasons to buy new cars today, but they are certainly pricier,” Jominy noted. “So do your homework before heading to a dealership.”

By homework, Jominy means not only researching the car and its features but also understanding your credit rating and securing the best loan rate possible before visiting a dealer. “Credit unions often provide the best rates,” he said. “Many consumers think showing up with cash will net them a great deal, but dealers actually make money on financing.”

Jominy also suggests not limiting your search to local dealers. “Dealers in the Plains states and Upper Midwest typically offer the best deals,” he said. “During the supply chain crisis in 2022, while others were charging much more, dealers in states like Iowa and Nebraska were selling below MSRP.”

“With the possible new tariffs potentially driving up prices on goods including cars, affordability will continue to be a pressing issue,” Jominy concluded. “Look at how quickly our payments have increased by over $150 since before the pandemic. If car payments remain high and don’t align with wage growth, affordability will continue to be a challenge.”

Contact Jamie L. LaReau: jlareau@freepress.com. Follow her on Twitter @jlareauan.