As recently reported by Time, auto loan rates are dirt-cheap at present. According to a study by WalletHub.com, a personal finance website, major car manufacturers are charging much less for financing. The priciest rates are from Fiat and Ford, but these are just less than 5 percent. BMW, Lexus and Chevrolet charge less than 3 percent while Audi and Buick charge much less at less than 2 percent.
However, the brands that made auto financing most affordable are Kia, Mazda, Honda and Acura. Their average annual percentage rates (APRs) were under 1 percent.
Compared to the APRs charged in the past, these rates are indeed dirt-cheap. These are significantly lower than what commercial banks offer. In 2009, the average commercial bank rate was about 7 percent. In November 2013, it was below 4.5 percent. Back in November 1990, when the website started tracking auto financing numbers, the average APR was high at above 11.6 percent.
At a time when APRs are very low, consumers should consider buying a new vehicle rather than a pre-owned one. New car rates have always been lower than used car rates, but as the WalletHub study showed, the gap between these rates is larger right now. The difference between rates is a record-high in 2 years: a buyer could pay about 15 percent less interest by purchasing new instead of used.
As expected, the study is with limitations and its results do not exactly reflect the current situation in terms of auto financing. WalletHub considered rates for auto loans with a 36-month term. However, car buyers in the U.S. rarely obtain 36-month auto loans. Majority of car shoppers choose to stretch repayment for 60 months to make their monthly payments more affordable.
Moreover, the APRs that WalletHub presented only applied to customers with high credit scores. These were rates that individuals with a credit score of 720 or higher are expected to receive. This means that auto loans will not be cheap for car buyers with low or even average scores; they will still get high rates and maybe even double-digit APRs.
As per Bankrate.com, the current average new car auto loan rate is over 4 percent, with banks offering rates under 3 percent for both new and pre-owned vehicles.
Banks are typically not as willing to lend to less creditworthy customers as dealerships are, but they offer better rates now. This is because auto financing is one of the bright spots in today’s economy. Now that banks are more likely to earn from auto loans compared to credit cards and mortgages, they will be more aggressive in auto lending. They will offer reduced rates to get ahead of the competition.
If you intend to buy a car soon and want a cheap auto loan, you should still comparison shop to find the lowest rate that you qualify for. Shopping around will be especially helpful if you have good credit, since you qualify for lower APRs.