Cars Are More Affordable Now. That's Not Entirely a Good Thing

What's going on in the car market as interest rates fall? New data shows that sales are picking up, while discounts and promotional financing deals have improved. Yet better deals on new cars are also helping depress resale values for used cars, and the number of past buyers who owe more on their loans than their cars are worth is also up sharply.

New cars are selling at a clip that's about 6% higher than a year ago. That's an indication that the market has become more buyer friendly, according to a new report from J.D. Power.

The Federal Reserve's September interest rate cut has prompted improvements in auto loan financing. The average interest rate for a new car purchase is expected to be around 6.7% in October. That would be a decrease of about two-thirds of a percentage point compared with a year ago, the report said. Dozens of cars even qualify for much-missed 0% APR financing, provided the buyer's credit is up to par.

The Fed's move isn't all that's sending vehicle financing rates lower at the moment. There's also the effect of what the auto industry calls "excess inventory," as in an oversupply of new cars on dealers' lots. After years in which demand for cars exceeded the supply, a more normal balance has returned, with new vehicle inventory up by 25% year-over-year. And dealer lots could get more crowded, now that vehicles of the model year 2025 are beginning to arrive at dealerships still stuck with some 2024 models, according to Cox Automotive.

All of which is helping to drive better deals for shoppers. For example, new car incentives are averaging about $3,500 or about 7.3% of the car price, up from just under 5% a year ago. On about 20 different models, those rebates are at least $5,000 or so, according to the tracking website RealCarTips.com.

The challenges of lower car prices

Car prices are edging down; the average new vehicle now sells for $44,904, which represents a $739 decrease compared to October 2023. But such an average is still beyond the reach of many consumers, who might once have bought cheaper, smaller vehicles, which fewer manufacturers have made a priority in recent years.

Nissan is one of the exceptions to that pricier trend. The company offers three 2025 models with sticker prices under $22,000, including the Versa, a compact sedan that starts at $17,190 for the manual version.

The legacy of prices that were even higher than today is part of what's behind the rise in people with older cars who are "underwater" on their loans — that is, owing more on the loan than the car is currently worth. According to a recent report from Edmunds, the proportion of used cars with "negative equity" has surged to about one in four dealer trade-ins, which is a third higher than the rate a year ago.

But the concern isn't just the number of such consumers, Edmunds says, but how much they owe. The company says the proportion of owners who are underwater to the tune of five figures is "nothing short of alarming." More than 1 in 5 consumers with negative equity owe more than $10,000 on their auto loan, and about a third of those people (7.5%) owe at least $15,000.

Those buyers experienced a double price whammy. Many paid over the list price during the pandemic, when prices soared, and are now suffering from a decline in the values for used cars. The average used car price is about $28,800, a 4.8% drop from a year ago, according to Cars Commerce.

Not that used cars are necessarily a lot more affordable than new models, once the cost of financing is considered. Loan rates for used vehicles are still averaging about 11%, which its far above the typical rates for new cars, and there are fewer incentives than when people buy a new vehicle.

More from Money:

8 Best Car Loan Rates

Biden Tries Again for Student Loan Forgiveness With a New Plan Targeting 8 Million Borrowers

Trump Wants to Give Americans With Car Loans a New Tax Break. Here's How It'd Work