While thinking about to buy a new car, find the best car finance with low interet rates is the first thing. Here are some financing tips from factors like lending sources, credit union option and payment term length.
To get the best possible interest rate on a car loan, it’s important to understand two things: the current marketplace for interest rates, including different lender options and financing offers, and your personal financial situation and its possible limitations. Though credit indeed became “tight” after the subprime-mortgage meltdown, as lenders swung from indiscriminate to overly conservative practices, car dealers say that misperception — more than a true financing shortage — has kept shoppers out of their stores. The situation has improved, especially as domestic manufacturers have ratcheted up incentive offers.
Several primary factors determine your interest rate:
Your lender. Unless you borrow money privately, you’re going to be working with a bank, a credit union or an automaker’s financing arm. There are various pros and cons to each scenario.
The car you’re buying. Are you buying a new car? A used car? A very used car? New-car rates are often the lowest.
Loan-term length. When automakers introduced zero percent financing to keep cars selling after the Sept. 11 terrorist attacks, they were only offered on two- and three-year loans. Now, many automakers are offering zero percent financing on five-year loans. In general, though, longer loans come with higher interest rates.
Your credit rating. Borrowers with better credit get lower rates. Jack Gillis, public affairs director for the Consumer Federation of America, estimates that only 15 percent of car buyers qualify for zero percent offers from automakers.
Car buyers borrow money from three primary lending sources: banks, credit unions and automakers. Loans from any of these sources may come through the dealer, who often serves as the middleman and takes a cut in the process.
Getting a loan through a car dealer is not, however, automatically more expensive. In fact, dealers provide the only way to get specialized low rates from automakers.
“How can you beat zero percent?” said Daniel Ray, editor in chief of Bankrate.com.
“When a [car] dealer arranges financing, it earns some type of compensation, which can sometimes be passed on to the buyer,” said Fritz Elmendorf, vice president of communications for the Consumer Bankers Association. That may happen in the form of a lower price or a lower interest rate.
Car dealers borrow money at wholesale interest rates, which they then mark up and pass on to you. Because the dealer’s rate is lower, the rate you get may be no higher than one you arranged yourself.
Elmendorf agrees, but says there’s a caveat: “Consumers can get very competitive rates at the dealer, but [they] need to educate themselves to make sure that happens.”
CNW Marketing Research data shows that credit unions — another good lending option — account for only 11.7 percent of loan financing. According to Datatrac, a market research firm specializing in the financial services industry, credit union rates in 2008 were roughly 1.4 percent lower over the course of the year than bank rates on 48-month new-car loans, and 1.7 percent lower on 48-month used-car loans.
Credit Union Option
While credit unions provide less than 20 percent of total auto loans, they often offer good rates for consumers. Below are the average interest rates offered for 48-month new and used auto loans during 2008.
Like credit unions, lots of banks will lend you money. For a further comparison of bank and credit union rates, check the websites of Bank Rate Monitor, E-Loan, LendingTree or the Credit Union National Association.
New or Used?
In general, new-car loan rates are better than used-car rates. Usually, only new cars qualify for zero percent financing, though some automakers occasionally push certified pre-owned stock with zero percent offers. In general, the older the car, the higher the rate.
According to Power Information Network, as of 2009 the average term for a new-car loan was nearly 64 months. This leaves consumers vulnerable to owing more on a loan than their car is worth, Gillis said, a condition that’s often referred to as being upside-down, or underwater.
“Sign up for the shortest term you can afford,” Gillis said. “If you know what your credit score is and the interest rate you qualify for from an outside lender, it makes it difficult for an auto dealer to sign you up for a higher rate.”
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