Delve Into The Mystery of Auto Loans

September 20, 2008

Contemplating auto loan rates can feel like walking through a fog-covered moor, where vapors provide a deceptively uniform covering over the earth, and the real “lay of the land” is far from apparent. What determines the interest rate on auto loans? What can you do to qualify for the auto loans with the lowest rates? The answer is occluded, shrouded in fog.

The fact is, the interest rate for car loans doesn’t ordinarily change much. Since 2001, the interest rate on car loans in the US has remained a steady 7-8%, despite the widely diverging state of the US economy. During that time, the US Federal Reserve Board has set interest rates from as low as 1% up to as high as 6%.

The reason? Auto financiers can decide whether or not to base their interest rates on the US prime rate, which is determined by the Fed. Alternately, they can base their interest rates on longer-term factors, such as the value of US Treasury bonds, which the Fed’s actions do not affect.

Perhaps with more than any other type of loan, the interest rates on your auto loan depend on you. More specifically, they depend on your personal credit history, as expressed through your FICO score. Customers with good credit histories and a high FICO scores represent less of a risk to lenders than those with poor credit histories and low scores.

Another factor that affects auto loan interest rates appears to be the age of the car you buy. Generally, the older the car, the higher the interest rate–no doubt because old cars have less value to begin with, and depreciate in value faster than newer vehicles. The interest rates on 3-year loans on new cars have varied from approximately 9.71% to approximately 6.89% . For the same-length loans on older cars, the rates have varied from 10.8% to about 7.7%.

These days, interest rates on auto loans are lower than they’ve been in years. No doubt, this is in part due to the high price of gas which, in turn, has caused the number of cars sold to fall. Many lenders are offering select customers special deals, often involving interest of 0% in exchange for meeting certain conditions.

How should you turn today’s economic uncertainty to your advantage, and to secure the best auto loans for yourself? Make sure you have a great credit rating, and be willing to pay off the loan quickly.

Since 2005, you’ve been entitled to receive a free copy of your credit report once every year. If you’re financing a car–or trying to secure any other type of major loan, for that matter–be sure to take advantage of the recent legislation. If possible, try to resolve any outstanding debts that could be bringing your score down.

If your credit score is still too low to qualify from the best rates from your car dealership, try getting a local credit union to finance your car. While these still look at your FICO score, credit unions tend to look more in-depth at your financial history. They are likely look for mitigating or explanatory factors in whatever is negatively affecting your credit rating,

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