What Will Higher Interest Rates Mean For Car Finance Customers
Interest rates have gone up yet again this month. What does that mean for your current car finance agreement, or a car you’re looking to buy? We have the answers.
As you will probably have heard by now, the Bank of England once again increased the official base rate for borrowing in the UK this week, which will have a knock-on effect for interest rates on almost all new finance agreements and some existing agreements.
The base rate was increased by three quarters of a percentage point to 3%, which is the eighth rate rise in eleven months, and its entirely possible that there may be more increases to come. However, its also worth pointing out that the current rate is still only about half of what it was prior to 2008 and is still historically very low.
The rate rises are in response to ever-increasing inflation and are designed to slow down spending. Similar increases are taking place all over the world the US equivant of the Bank of England also put its rates up by the same amount this week so its certainly not a UK-specific issue.
Given that most cars are heavily financed, there is naturally a lot of concern from car buyers and car owners about what this means for their finance agreements. So heres what you need to know:
What will higher interest rates mean for car finance customers?
Best Auto Loan Rate: Conclusion
You can find the best auto loan rates through various banks, credit unions, online lenders, and dealers. There are also many factors that affect your interest rates and different methods for you to get the lowest rates possible. We encourage you to shop around and compare your options to find the best auto loan for you.
Below are some frequently asked questions and answers about the best auto loan rates:
Consumers Credit Union Reviews
Consumers Credit Union has a relatively strong standing in the industry. It is accredited by the BBB and holds an A+ rating from the organization.
There arenât many Consumers Credit Union customer reviews across review sites. However, the positive reviews we found praise the lenderâs good customer experience, consistently great rates and low fees.
Customers are also pleased to be part of a member-owned organization instead of a bank. That said, people who reported a negative experience with Consumers Credit Union report technical issues and delays with applications.
Our team reached out to Consumers Credit Union for a comment on these reviews but did not receive a response.
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What Determines Your Apr On A Car Loan
APR accounts for both your car loan interest rate and the cost of any financing fees and prepaid expenses. The Truth In Lending Act , a federal law, requires lenders to disclose the APR on your vehicle purchase before signing a loan agreement. An example of a prepaid expense would be an origination fee.
Your interest rate usually makes up the biggest part of the total APR on your vehicle. Because of this, lowering your interest rate can help you get the best APR on your car loan.
A loan origination fee is the amount of money youll pay upfront to cover the cost of processing your loan. These fees can be a small percentage of your loan amount or a flat fee.
Average Interest Rates By Term Length
Most banks and credit unions provide payment plans ranging from 24 to 72 months, with shorter term loans generally carrying lower interest rates. The typical term length for auto loans is 63 months, with loans of 72 and 84 months becoming increasingly common. The higher APRs of longer term auto loans, however, can result in excessive interest costs that leave borrowers upside downthat is, owing more on the auto loan than the car actually costs.
Heres a closer look at average interest rates across various loan terms for those with the strongest credit.
|Auto Loan Term|
While longer term loans allow for a lower monthly payment, the extra months of accumulating interest can ultimately outweigh the benefit of their lower short term cost, especially for the consumer purchasing an older used car whose value will depreciate quickly.
Terms of 72 and 84 months are also usually available only for larger loan amounts or for brand new models.
For example, when paid over the course of 48 months, a $25,000 loan at a 4.5% interest rate will result in monthly payments of $570 and a total cost of $27,364. When paid over the course of 84 months in $348 monthly payments, this same loan at the same interest rate costs a total of $29,190 more than $1,800 pricier than at 48 months. For higher interest rates, the difference between short and long term payments will be even greater.
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Best Auto Loan Rates: Compare Top Lenders
As mentioned, one of the simplest ways to find the best auto loan rates is to shop around. Do this before you get in the room with a loan officer at a car dealership. You can get as many offers as you want, as long as you make sure they only require a soft credit check.
When youre ready to move forward with an offer, you can go through the full loan application process with the financial institution that gives you the best auto loan rates overall. Below you can start comparing the best auto loan rates available.
Whats The Difference Between New And Used Car Interest Rates
Loans for newer cars tend to have lower interest rates than those for used cars. Lenders see newer cars as less of a risk theyre less likely to break down and lenders can identify exactly how much theyll depreciate over time. Newer cars also have more predictable resale value than older cars, and that predictability results in a lower interest rate.
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When Should You Refinance Your Car Loan
Refinancing your car loan comes down to saving you money. If you are struggling to afford your vehicle payments or think you could receive more favorable terms, its a good idea to consider refinancing your current loan. Here are the three main scenarios where refinance is the right choice.
Improving Your Credit Score
If you’re able to take a few months to improve your credit score, you can lower your interest rate. One of the best ways to do this is to lower your debt-to-income ratio by paying down other debts you owe. You can also continue to make on-time payments to reduce the impact of recent late payments.
A higher credit score will help you qualify for better loan rates, but it may take several months for you to improve your score. Some people see faster results when they make two payments each month instead of one, depending on how often the creditors report to credit bureaus.
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Is Refinancing A Car Worth It
To determine if refinancing is worth it for you, you must consider if you will truly save money with new loan terms. For many drivers, it does prove to be worth it if their credit score has improved since they first took out their auto loan, or they originally financed through a dealership. Take advantage of an auto refinance calculator to find out if you will save money with a new loan.
Average Car Loan Interest Rates
In 2022, new car loan rates range from 2.40% to 14.76% while used car loan rates range from 3.71% to 20.99%. The difference between a low and high annual percentage rate is based largely on your credit score.
This article will explain the factors that determine how lenders set APRs and offer tips for finding the lowest auto loan rates. Also read our review of the best auto loan providers to learn about and compare the top lenders in the industry.
- Average monthly savings of $150
- Work with a personal loan concierge to compare options
- A leading provider in refinance loans
Up to 843.2%
- Get approved in as little as 60 seconds
- All credit types gladly accepted
- Absolutely no obligation
Up to 72Varies
- Great for customers with limited/no credit
- Offers special military rates
- Average monthly savings of $145
- Online Application
Up to 72Varies
- Great for customers with limited/no credit
- Offers special military rates
Up to 842.49%
All APR figures last updated on 9/1/2022 – please check partner site for latest details. Rate may vary based on credit score, credit history and loan term.
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Can I Sell My Car With A Loan
It is possible to sell your car with an outstanding loan, but you may have to go through a few extra steps. If your car is worth less than what you currently owe on the loan, you have what is known as negative equity meaning you may need to pay the difference out of pocket or refinance the remaining amount with a different type of loan.
If your car is worth more than what you currently owe, on the other hand, you may be able to pocket the difference in cash when you sell the car. Whatever your situation, reach out to your lender about your options, as each lender sets different rules for selling a car with a loan.
Example: Interest On A $26000 Car With A Loan Term Of 5 Years
Given the central banks rate increases and the low availability of cars in 2022, car loan interest rates in Canada have gone up. The following example shows the amount of interest you could end up paying for a new $26,000 car assuming a loan term of 60 months, 13% provincial sales tax and a 20%down payment of $5,200.
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What Should You Consider When Choosing An Auto Loan
In a recent interview with Kathryn J. Morrison, consumer affairs expert and instructor at South Dakota State University, she said “When shopping for an auto loan, one needs to consider more than just the interest rate. Are there any additional fees that you will be charged? Do you need to have a down payment to qualify for this rate? What is the total loan amount, and how much interest will you be paying over the life of the loan?”
There’s a lot to take into account when choosing an auto loan. Your credit score, for example, has a major impact on the rates you get. The best rates typically go to those with excellent credit. At the end of Q2 2021, the average credit score was 732 for a new-car loan and 665 for a used car loan, according to a report from Experian.
In Q2 2021, borrowers who received the lowest rates had a score of 781 or higher. Those borrowers, also known as super-prime borrowers, received an average APR of 2.34% for new cars and 3.66% for used cars. Prime borrowers with a credit score between 661 and 780 received an average APR of 3.48% for new loans and 5.41% for used loans, while nonprime borrowers with credit scores between 601 and 660 received an average APR of 6.61% for new car loans and 10.49% for used.
It’s also important to consider what term fits your financial situation. Longer terms generally have lower payments but cost more over the life of the loan.
Outlook For Auto Loan Interest Rates
2022 has already proven to be a complicated one in all facets of American finance. And, unfortunately, the automotive industry has not come out unscathed. Decisions made by the Federal Reserve and the remaining supply chain issues all play a part in how much it’s going to cost to finance your next car.
The increased Fed rate, sitting at 3-3.25 percent following the September meeting, will indirectly affect your rates. But, while the federal funds rate determines what lenders base their rates on, it is not the only consideration.
When combined with the tumultuous state of the car-buying market, it results in a more expensive experience overall. Kelley Blue Book reports that new vehicle costs were as high as $48,000 in June 2022.
With all of this in mind, consider approaching your next loan with extra care. Be sure to apply for preapproval and shop multiple lenders.
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Best Online Auto Loan: Lightstream
- 5.99% to 11.99%* with Auto Pay & Excellent Credit
- Minimum loan amount: $5,000
LightStream offers a fully online process for its extensive list of vehicle loan options. It’s very transparent about its rates and terms, and it has few restrictions on what kind of car it will finance. However, it scored below average marks in the J.D. Power 2022 U.S. Consumer Lending Satisfaction Study for personal loans.
No restrictions on make, model, or mileage
Offers unsecured loans to borrowers with excellent credit
Prefers borrowers with good credit
LightStream is a division of Truist Bank. It stands out for its online lending process. Borrowers can apply online, e-sign the loan agreement, and receive funds via direct deposit as soon as the same day.
LightStream also offers a remarkably wide range of auto loan options, including new and used dealer purchases, refinancing, lease buyouts, and classic cars. It even offers unsecured loans for those with excellent credit.
Rates from the lender start as low as 5.99%, which includes a 0.5%-point discount for autopay. The maximum APR on a LightStream loan is 22.99%.
Consider An Extended Warranty
On a related note, if you purchase an extended auto warranty through a dealership, the cost can often be rolled into your monthly car payment. However, that will increase your loan amount and the total interest you pay. It can be a better idea to purchase a standalone vehicle service contract a bit later on if you want to save money and keep your car protected.
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Average Interest Rates For Car Loans With Bad Credit
Experian, one of the country’s three main credit bureaus, issues quarterly reports that study data surrounding the auto loan market. Their State of the Automotive Finance Market Report from the first quarter of 2022 found that the average interest rates for both new and used auto loans look like this:
Using the average used car loan interest rates from the first table, you can see that as credit scores drop and the interest rate increases, the total cost of financing goes up dramatically.
What Is A Good Auto Loan Interest Rate
A good auto loan interest rate is usually 4% or lower, but typically the best auto loan rates are for new cars. According to the 2022 report from the National Credit Union Administration , the average 60-month new car loan from a credit union has an interest rate of 2.78%. From a bank, the average rate is 4.69%. So, if you find these rates or lower, you know youre getting a fair rate on your car loan.
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How Do I Refinance My Car Loan
Refinancing a car loan is essentially just taking out a new car loan so the steps for applying are mostly the same. You will need your driver’s license, Social Security number and proof of income, as well as details about your car. If approved, you will use the funds from your new loan to pay off your old car loan, then begin making monthly payments with your new interest rate and terms.
Best Auto Loan Rates Of December 2022
Amanda Garland is a personal finance blogger living in Dallas, TX. She has a Bachelor of Fine Arts degree in Creative Writing and recently started her own blog on saving money while raising a baby.
Steve Rogers has been a professional writer and editor for over 30 years, specializing in personal finance, investment, and the impact of political trends on financial markets and personal finances.
Getting the lowest possible APR can help you lower your monthly loan payment or help you pay off your vehicle sooner. Those are important goals, so lets take a look at the best auto loan rates available and find out how you can land them.
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Can I Get 0% Financing On A Car Loan
You may see dealerships advertising 0% financing on their cars. With 0% financing, you buy the car at the agreed-on price, and then make payments on the principal of the car with no interest for a number of months. However, keep these points in mind:
- 0% interest may only be offered for part of the loan term.
- To be approved, youll need spectacular credit .
- Negotiating the car price will be difficult.
- 0% interest car financing is only available for certain models.
- You may not get as much money for your trade-in vehicle.
- The loan structure will likely be set in stone.