How to Finance a New Car When Interest Rates Are Ridiculous
The car you are considering can be more expensive than you expected. Car loan interest rates are the highest since 2009, writes Edmunds’ Ronald Montoya. The average annual interest rate on new funded vehicles in March was 6.4%. For used cars – 9.5%.
“While the rise in car loan rates is a sign of a healthy economy, it also means that financing a car will be more expensive,” explained Montoya.
Why today’s interest rates seem so high
If 6.4% seems high, it is because we are used to new car financing rates, which have hovered around 4% in recent years.
Experienced car owners may recall that in the early 2000s the rate was around 9%. But paying for a funded car is also much more popular than it used to be; In 1999, 20% of Americans had a car loan, up from 35% last year, Bloomberg reports .
How to get around high interest rates on car loans
Now that we are used to lower rates and the once plentiful offer of 0% funding , the hike in interest rates can be confusing for car buyers. Add these rising interest rates to the fact that cars are getting more expensive and that auto loans are for 96 months , and you end up with a fairly large financial burden on something that depreciates almost immediately .
If you have good creditworthiness, Montoya notes that deals with low annual interest rates in the 2-3% range still exist. Prime and super-prime borrowers – with a credit rating of approximately 650 and above – may not notice the rate hike at all.
Meanwhile, if you have bad credit, take your time with the funding process. “If you have bad credit or ‘sub-prime’ credit – roughly 501-600 FICO points – you can easily pay twice the average annual interest rate on a new car loan,” warns Montoya.
Focus on a good credit rating to improve your chances of funding
Interest rates may remain unchanged this year as the Federal Reserve has no plans to raise rates as much as it did last year when it authorized four rate hikes . But since you cannot control the Fed, you need to stick to what you know: your credit rating.
Before you start testing cars in the parking lot, finding funds for preliminary approvals will help you prepare for the negotiation process. Instead of running to the dealership and taking the interest rate they offer, go for two or three rates from banks or credit unions. Even if your loan isn’t perfect, you will have a clearer idea of what interest rate you can count on.