Auto Loan Rates Up Slightly from Last Week; Longer Terms Popular

Auto financing just got a bit more expensive. The average rate for a 5-year new-car auto loan rose to 3.21% during the week ending July 4, 2014, according to Bankrate.com. That’s an increase of nine basis points, or 0.09%, from last week’s average of 3.12%.

Borrowers with bad credit could pay significantly more than this, because lenders tend to charge higher auto loan rates for “high-risk” consumers. Here’s the the latest on these, and other, developments from the world of car financing.

Auto Loan Rates Up This Week, in All Categories

Bankrate’s latest survey showed increases across all loan categories:

  • 4-year used — The current average rate for a 48-month used car loan rose from 2.83% last week to 2.95% this week.
  • 5-year used — The average rate for 60-month used-car financing climbed by 16 basis points from last week, to land at 2.71%.
  • 5-year new — Borrowers who opt for a 60-month loan on a new car paid an average of 3.21% this week, up slightly from last week.

Of course, the ongoing uptick in auto loan rates hasn’t done much to slow sales. In May of this year, sales volume rose to its highest point since the credit bubble days of the early to mid 1990s.

This surge in demand could push average interest rates even higher over the coming months. Lenders tend to charge more for financing when demand rises, and charge less when demand tapers off. If that pattern holds true, we could see higher interest rates and APRs going forward.

Car buyers appear to be taking out longer loans as well, with six and seven-year loans becoming more common in the current market. These products offer lower monthly payments, because the payments are spread over a longer period of time. But they also increase the total amount of interest paid by the borrower, and in two ways. Auto loan rates tend to be higher for these longer-term products, because the lender bears more risk. And since you have more payments to make, you end up paying even more interest.

Borrowers need to look at the big picture, not just the monthly payments.

Bank of America Offers 5-Year Car Financing at 2.34%

At the time of publication, Bank of America was advertising an annual percentage rate (APR) of 2.34% on 5-year new-car auto loans. That’s lower than the average from the Bankrate survey. But it assumes you have an excellent borrowing history. This means having a high credit score with few, if any, missed payments in the last few years.

This is what those car commercials are talking about when they mention “well-qualified borrowers.” Borrowers with lower credit scores could pay significantly higher rates on their auto loans, since they are perceived to be a higher risk.

Want to spread your loan out over six years instead of five? It will cost you more. Bank of America advertised their 72-month loans with an APR of 2.44%, at the time of publication. Here again, this is for highly qualified borrowers with solid down payments and good credit. Less qualified consumers will pay more in interest.

* Please see disclaimers below regarding third-party data.

Increased Loan Availability to Borrowers With Bad Credit?

The Office of the Comptroller of Currency (OCC) published a report in June that showed signs of easing within the auto loan industry.

According to the report: “Competition for limited lending opportunities is intensifying, resulting in loosening underwriting standards, particularly in indirect auto and leveraged lending.”

Indirect lending in this context is when the car dealership acts as an intermediary between the bank or finance company on one side, and the consumer on the other. An example would be when you obtain financing through a dealership, instead of going directly to a bank.

The OCC report also offered this bit of insight: “Many banks continue to re-evaluate their business models and risk appetites to generate returns against the backdrop of slow economic growth and low interest rates.”

Translation: these companies are now willing to offer auto loans to borrowers who may not have qualified previously, due to bad credit and other issues. Whether that’s good or bad for the broader economy is up for debate.

It might be getting easier for poorly qualified borrowers to secure financing. But it’s certainly not getting any cheaper. Borrowers with lower credit scores (which typically result from payment delinquencies in the past) tend to pay higher auto loan rates. Sometimes significantly higher. Subprime lending, as it’s known, is a major profit center for these companies.

Disclaimer: This article includes third-party data that is deemed reliable but not guaranteed. The interest rate you receive on a car loan may differ from those mentioned above, due to a variety of factors. Your credit history, the size of your down payment (or lack of one), and the length of your loan will all influence the rate you receive from a lender. There are other variables as well. This information has been provided for reference purposes only and does not constitute financial advice.