Go the extra mile when shopping for auto loans
By Greg McBride, CFA • Bankrate.com

There exists a tremendous disparity in auto loan rates, and the evidence may be as close as your own driveway. Shopping around for an auto loan can be the difference between finding a rate of 5 percent or settling for a rate of 11 percent.

Each week, Bankrate.com conducts a survey of the five largest banks and five largest thrifts in each of the 10 largest metro areas. The disparities among, and within, markets can be startling. Of the 10 institutions surveyed in the New York metro area, half either do not offer new-car loans or don't offer the product in accordance with Bankrate.com's research criteria. The gulf in rates for the remaining five institutions extends from a low of 5.39 percent to a high of 11 percent.

The same phenomenon exists for used-car loan rates as well. Among the largest banks and thrifts in Los Angeles, the best available used-car loan rate to qualifying borrowers is 4.34 percent, while another institution quotes a rate of 14.25 percent for the same three-year, $10,000 loan with a 20-percent down payment.

However, alternatives do exist. In addition to many attractive manufacturer financing offers still available for new-car loans, rates under 4 percent can be found for both new- and used-car loans in the Bankrate.com auto loan rates tables.

While higher interest rates do not have the pronounced effect on auto loan costs that they do on mortgage loans, higher rates still exact a price. The average amount financed on a new-car loan according to the Federal Reserve as of January 2004 is $27,240, and is financed for an average of five years.

First, let's look at how the interest rate disparity affects monthly payments. The monthly payment for a five-year, $27,240 loan at 5 percent is $514.05, but is $592.26 at 11 percent. The difference of $78.21 per month amounts to more than $900 each year in extra interest charges.

Another fact about paying higher rates is that the loan balance declines more slowly than at lower rates. In the same five-year loan comparison -- where one loan is at 5 percent and the other at 11 percent -- the balance after two years of payments is $938.90 lower on the loan financed at 5 percent. This difference widens to $990.12 after the third year, before gradually declining in the final two years of the term. This matter is of particular concern if the buyer intends to trade the vehicle in the loan's early years due to the increased likelihood of being upside-down in the loan, or owing more than the car is worth.

In addition to determining interest costs, the difference in rates also affects decision-making. Deciding which debt obligation to pay off first could be affected if the interest rate on the auto loan is at the wrong end of the spectrum. An auto loan rate of 11 percent is akin to credit card debt and is sufficiently high enough to mandate accelerated repayment effort or refinancing at a lower rate, depending on the borrower's overall debt picture. At a rate of 5 percent, the advice is much different. A fixed rate of 5 percent means there is no particular hurry to pay off or refinance, and affords the borrower the opportunity to instead pay down other more-expensive debts or maximize retirement contributions. To best determine how to pay down debts, check out Bankrate.com's Debt Pay-Down Adviser.

With auto loans, more than any other product, the merits are readily apparent of shopping around for the most-competitive terms. Failing to do so may put borrowers into loans, and even vehicles, they later resent.

Greg McBride is a financial analyst for Bankrate.com.

For advice regarding your specific situation, please e-mail one of Bankrate.com's Q&A experts or visit the Advice & Community channel on Bankrate.com.