Car loans are one of the fastest growing parts of the consumer credit market. With prices for automobiles climbing rapidly and an increased demand for vehicles due to an influx of people needing to commute to work, many consumers are in a position where they need to carefully evaluate their auto loan options.
As many consumers enter the market for a new or used vehicle, they’re quickly finding out that prices are much higher than they expected. While this might be good news to people who are hoping to get a lot for their trade in, more and more people are trying to rework their budgets in order to afford the vehicle they want.
Fortunately, the new cars on the market are predicted to last longer than ever. While financial experts once told people to not expect to hold on to a car for longer than five years, it’s not uncommon for vehicles today to be on the road for ten years or more. Because of this, there is a growing movement to extend car loans to seven years.
A seven-year car loan gives consumers several extra years to get a vehicle paid off. This allows them to spend more on the vehicle they really want, or they can save money each month by paying less. Seven-year car loans are slowly becoming the norm, in fact, as more and more consumers see these loans as a way to make a vehicle purchase fit into their budget more easily.
What is a Good APR for a Used Car Loan?
Seven-year loans can be used for new or used vehicle purchases. Typically, interest rates tend to be slightly higher on used car loans, but usually by an eighth of a point or less. Pinpointing the rates that are being offered at any given time, however, can be a challenge. Rates will depend on a number of factors.
Banks will set their rates based on the rates being offered in the government bond market. These rates fluctuate often, so it can be difficult to determine what a “good” interest rate is. Rates that were “good” a year ago, for example, may be too high or absurdly low by today’s standards.
Furthermore, rates for individuals are determined by a host of other factors. A person’s credit score, their average monthly income, debt to income ratio, and the amount of time they’re had credit can all contribute towards the actual rate that a consumer will get. Consumers with excellent credit scores, good credit history, a down payment (or trade-in), and sufficient income will likely qualify for the best rates. Consumers that have less than stellar credit, however, will likely pay higher rates.
Because of this, it’s easier to give a range of interest rates to answer the questions about what interest rates are considered to be “good”. Currently, interest rates between five and eight percent are considered to be some of the best rates on the market. Rates that are higher than this, however, are often offered to customers who have very little or bad credit history. If you are in a position where you are not being offered the best rates available, ask your loan officer what you can do to get a better rate.
Is It Better to Get an Auto Loan from Your Bank or the Dealership?
When shopping for an auto loan, a consumer does not have to just stick to the bank that he or she has their checking account with. There are thousands of banks that offer auto loans, making it a good idea to shop around. One of the first questions that any consumers ask is whether rates are lower through a bank or at the dealership.
This question does not have an easy answer. To start, it’s important to realize that loans through dealerships aren’t actually through dealership. In the United States, dealerships are required to have a banking institution who actually processes and services their loans. That means that all loans actually come from banks.
A dealership does have a special relationship with the bank that handles their loan business, however. That doesn’t necessarily mean that they use that relationship to get their customers the best deals. In actuality, dealerships advertise very low rates (sometimes even zero percent), but actually getting those rates is extremely difficult. The requirements to qualify for the best rates from a dealership are often set so high that very few people actually qualify. Instead, dealerships use these rates as “teasers”. They convince people to come into the dealership and look at a new car under the belief that they can get a good deal, then convince them to take a loan with a much higher rate once the salespeople believe they have made a sale.
Dealerships can also offer better loan terms when a potential customer is about to walk away from the deal, however. In the event that a salesperson cannot get a car to fit into a customer’s budget, it’s possible to lower the interest rate slightly in order to close the deal. The problem, of course, is that the consumer has no real means to judge if they are getting a fair deal or not.
The truth is, it’s next to impossible for a consumer to judge whether or not a dealership loan is a better deal than a bank loan unless they get quotes from each of these sources. While some dealerships will offer to run a consumer’s credit in order to show them comparative offers, the truth is that these figures can be just as easily manipulated as the loan interest rate from their own banks. In fact, many dealerships receive a kickback or “finder’s fee” for steering their customers to the loans of a particular bank, regardless of whether or not this is the best interest rate for the consumer.
That means that consumers have to be proactive about seeking out the best interest rates. People who are thinking about buying a new car should apply for a loan at several different banks or credit unions and look for the best interest rate on their own. When these consumers walk into a dealership, they know that they have already found the best interest rate possible on their own. If the dealership can beat that, then the consumer knows that they’re getting a good deal. If the dealership can’t beat that rate, then the consumer knows that they have found the best rate possible on the market on their own.