The first week of a new month or new quarter is frequently the timetable for institutions to implement any loan re-pricing.

What we are seeing now could be the initial stages of what happens to auto loan rates in the absence of Fed rate changes.

Rates on car loans, which are most frequently benchmarked to the prime rate, rose steadily between mid-1999 and mid-2000 in response to the series of Fed rate hikes. With the Fed leaving rates alone since May, car loan rates have stabilized, too.

But during periods of prolonged interest rate stability, when the prime remains unchanged, auto loan rates invariably begin to drop.

Chalk this up to the competitive forces in the marketplace. As loan demand slows, banks generate loan activity, and market share, by undercutting the competition.

These institutions often prefer to make a loan at a somewhat compressed margin rather than not make the loan at all. The margin is the difference between the rate a bank pays for loanable funds and the rate at which it loans the money.

The empirical evidence from prior years bears this out. Between March 1997 and September 1998, a period when the prime was unchanged at 8.5 percent, the average new-car rate dropped 50 basis points from its peak, while used-car loan rates dropped 30 basis points. A basis point is one-one hundredth of a percent.

Back up a few more years and the trend still holds. After rates stabilized in late 1992, new-car loan rates dropped 125 basis points (1.25 percent) by February 1994, despite a steady prime rate of 6 percent.

The inevitable competition between lenders provides consumers with additional incentive to comparison shop between banks, savings and loans, credit unions and manufacturer finance offers to find the best deal.

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