Auto loans

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When the Federal Reserve meets, we all have questions: What does it mean to me? Will I be able to get a cheaper car loan when I replace my clunker? Bankrate is here to help. We’ve looked at five categories — mortgages, home equity loans, auto loans, credit cards and certificates of deposit — to determine if the Fed’s moves made you a winner or a loser. Here’s a look at auto loans:

 Winner: Auto loan shoppers

Auto loan interest rates haven’t moved much in recent months and they will continue to stay fairly low — for borrowers with good credit.

“For stronger borrowers, I haven’t seen an awful lot of movement in auto loan interest rates,” says Bill Vogeney, senior vice president and chief lending officer with Ent Federal Credit Union in Colorado.

It’s a different story though for borrowers with marginal credit scores or people drowning in negative equity who want to get into a new car.

“I sense that rates are rising for the weaker borrowers and for borrowers who are financing a larger portion of the purchase price. Really, we’re really talking about people who are financing over purchase price, over MSRP. They need to borrow more than that because they are upside down in their current car,” says Vogeney. “Rates are moving up for them — if they are able to get financing at all.”

Kevin Kopp, director of indirect lending at Wolters Kluwer Financial Services, agrees that market forces are influencing lenders.

“The availability of consumer credit has been affected because of the mortgage losses that have hit the lenders,” he says. “A lot of them are not willing to lose money in their auto loan portfolios. In general, most are looking for higher quality credit customers.”

According to the G.19 consumer credit statistical release from the Federal Reserve for the month of May, the average 48-month new-car loan from a commercial bank carried an interest rate of 6.81 percent. The average loan from an auto finance company carried an interest rate of 5.71 percent. 

Unfortunately, consumers continue to default on their auto loans at high rates. In early July, the American Bankers Association released their quarterly report on consumer loan delinquencies for the first quarter of this year.

Though indirect auto loan delinquencies fell 4 basis points, to 3.09 percent, from the previous quarter at the end of 2007, Keith Leggett, senior economist at the American Bankers Association, says the movement is not very significant.

“Delinquencies remain stubbornly high,” he says. “For the next couple of quarters we may see some benefit because of the stimulus checks. They may provide some temporary relief. But when you look at the prevailing headwinds that are confronting the consumer, higher food costs and energy costs and a lagging job market, it’s something that will continue for some time.”

Rising levels of late payments and loan defaults can sway lenders when pricing their loans.

“Delinquency always affects lenders rates,” says Kopp. “The rates are commensurate with the risk.”

 Take action

If you need to finance a used or new car in the near future,
hike up that credit score. Lending standards have shifted so borrowers with marginal credit may have a tough time getting financing.

Don’t worry though; if your credit won’t allow you to borrow enough for a new car, there may be a used car in your future. Use this
calculator to determine if a used car might be right for you.