2014 is predicted to be a big year for car sales, and the cost of financing one is dirt-cheap right now.
A new study from personal finance site WalletHub.com shows how much the major car brands charge for financing. A few — Honda and its luxury sister brand, Acura, Kia and Mazda — have average APRs below 1%. Buick and Audi both come in just under 2%, and Chevy, BMW and Lexus all are under 3%. Even the most expensive rates, which come from Ford and Fiat, don’t crack the 5% mark.
From a historical standpoint, car loans are at bargain-basement prices right now. The average commercial bank APR was just under 4.5% as of November. Five years ago, it was around 7%. Compare that to November 1990, when WalletHub started tracking these figures: back then, the average APR was a bit over 11.6%.
“The averages are just a bit removed from record lows hit in the second half of last year,” says Greg McBride, chief financial analyst at Bankrate.com.
As is typical, rates for new cars are cheaper than ones for used cars, but the gap is especially wide right now. “You’ll pay 15% less interest on a new car than a used one these days – the highest spread recorded in the last 2 years,” WalletHub’s report says.
Now, there are a few “buts” here: WalletHub looks at the rates for a 36-month loan, and a lot of car buyers want a 60-month term for a more manageable monthly payment.
Also, these rates are what people with credit scores of 720 or better can expect to get. With lower credit, you’ll probably still be able to get a car loan, but you might be limited to what the dealer offers, and you could wind up paying high single digits or even double-digit interest rates, McBride says.
Banks aren’t as interested in these riskier customers because, while a car loan has the advantage of being a secured debt — stop making those payments and the lender can lay claim to the collateral — they don’t really want to be in the car business. For a dealer, though, reselling a repossessed car isn’t as much of a stretch.
And if you have good credit, it still benefits you to shop around, McBride says. “These are available for Americans with credit of 700 or better, so it’s not just for the 1%,” he says.
The average new car APR as calculated by Bankrate is currently just above 4%, he says. “But the lowest rates we see among banks are rates below 3% on both new and used.”
In fact, if you’re not going with dealer financing, your best bet might not be a bank at all. “Credit unions provide 40% lower interest rates for new car loans and 44% lower interest rates for used car loans than traditional banks,” WalletHub says. In its survey, it finds that credit unions offer an average 2.24% APR on new car loans, and 2.54% on used cars. (Again, this is for 36-month loans.) McBride says Bankrate sees some credit union rates dropping below 3%, similar to what banks are offering.
Rates are so low right now because competition between lenders has never been fiercer. Historically, big banks haven’t been as competitive on car loan rates because they didn’t have to be; they had mortgage and credit card portfolios that earned them a lot of money. In today’s economy, though, car loans are one of the few bright spots, so big banks are fighting for a piece of that pie.
If you’re a prospective car buyer, their loss is your gain.“It’s one area of the lending business where the demand is pretty solid,” McBride says. “Banks have seen pretty slack loan demand in other products.”