Auto loan rate forecast for 2021: Rates dip as prices rise

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Americans planning to buy new or used cars in 2021 might not see auto loan rates come down as drastically as the year before, but rock-bottom interest rates will still be on their side.

The national average rate for a 60-month new auto loan started the year at 4.24 percent and had dropped to 4.18 percent as of June 30, according to Bankrate data. Similarly, rates on a 36-month used vehicle loan began at 4.53 percent and declined to 4.49 percent.

Helping to keep rates so borrower friendly in 2021 is the Federal Reserve, which has made clear it intends to stay the course through this year and quite possibly through 2022 as well, says Bankrate Chief Financial Analyst Greg McBride, CFA. A key form of short-term borrowing, auto loans are directly influenced by the Fed’s benchmark interest rate, the federal funds rate.

“The financing backdrop this year is very favorable with low interest rates, a rebounding economy and lots of competition among lenders,” McBride says.

Rates will continue to decline slowly

Following the sharp declines of 2020 brought about by the COVID-19 crisis, auto loan rates have continued to come down this year, albeit more slowly. This trend will likely continue through the remainder of 2021.

“Amid the recovering economy, the Federal Reserve is still going to keep the interest rates low,” McBride says. “New car loan rates are currently at their lowest since early 2015.”

Shoppers finding low inventory

The problem for car buyers this year, however, McBride says, is the lack of car inventory at dealers across the country. The global chip shortage has continued to severely impact the supply and availability of new cars. North American inventory at the end of May 2021 was about 1.5 million vehicles compared to 2.6 million at the end of May 2020, according to the National Automobile Dealers Association (NADA), and it’s projected to drop to 1.3 million by the end of July. The problem is further compounded by high consumer demand.

“There is a shortage of new and used vehicles on dealer lots, which has been an impediment to car sales,” McBride says.

New and used car prices on the rise

Challenges with new car inventory are not making prices any more favorable for consumers. The estimated average transaction price for a new light vehicle in the U.S. reached $41,263 in May 2021, a steep 5.4 percent increase from the same time last year and up 1.2 percent from April 2021, according to Kelley Blue Book.

Purchasing a used car has historically been a way to save money when buying a car, especially given how quickly a new car’s value depreciates. Used vehicle prices usually trend much cheaper. However, the new vehicle shortage is having an impact on used car prices too. In the second quarter of 2021, the average transaction price for a used vehicle reached $25,410, up from $20,942 in the second quarter of 2020, according to Edmunds.

The cost of a used vehicle began to climb in the first quarter of 2021, NADA says, and prices are expected to remain elevated for the foreseeable future while new vehicle production challenges continue to be an issue. By year’s end, used car prices may be as much as 6 percent higher than the same time last year, and will remain higher than pre-coronavirus levels, according to J.D. Power.

Score a lower interest rate by focusing on your credit score

The key to whether you’ll be able to score the most favorable interest rates on a loan for a new or used car is your credit score.

Generally speaking, the highest interest rates are reserved for those who might look riskier based on their credit profiles. According to data from Experian for the first quarter of 2021, the average annual percentage rates (APRs) on used and new car loans were 21.07 percent and 14.66 percent, respectively, for individuals with credit scores between 300 and 500. That compares with used and new car loan APRs of 3.71 percent and 2.41 percent, respectively, for those with top-tier scores between 781 and 850.

Improving your credit score is the best way to boost your chances of qualifying for a more competitive interest rate. Making timely payments and keeping your credit utilization ratio low, diversifying your credit mix and frequently monitoring your report should be on your radar. You may also be able to negotiate a better offer or loan term with your lender if you have strong credit but feel like your rate isn’t competitive.

Next steps

Bottlenecked manufacturing and chip shortages caused by coronavirus-related shutdowns continue to impact both new and used car prices. Those willing to be patient and wait out all of the challenges may be able to score better deals on car purchases.

If you’re intent on buying a car now, Edmunds recommends being prepared to do more research and being more flexible than normal with your budget to get the vehicle you want. The auto industry firm says 12.7 percent of buyers paid above sticker price for a new vehicle in April 2021, compared to 11 percent the previous month and 8.1 percent in April 2020. You should also be prepared to act more quickly when you find the car you want and consider expanding your search radius amid the tight market.

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Written by
Sarah Foster
U.S. economy reporter
Sarah Foster covers the Federal Reserve, the U.S. economy and economic policy. She previously worked for Bloomberg News, the Chicago Tribune and the Chicago Daily Herald.
Edited by
Associate loans editor