Americans planning to buy a new or used car 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 for a 60-month (five years) new car loan rate is expected to sink to 4.08 percent in the year ahead, while rates on a 48-month (four years) used vehicle loan are projected to average out to 4.75 percent in 2021. That’s according to Bankrate chief financial analyst Greg McBride, CFA, whose projections are based on Bankrate’s historical rate data as well as nationwide surveys of top lenders.
Helping to keep interest rates low in 2021 is the Federal Reserve, which has signaled plans to keep borrowing costs pinned at zero until at least 2023 and run the economy hot as it recovers from the devastating coronavirus downturn. A key form of short-term borrowing, auto loan rates move in lockstep with Fed moves — directly influenced by the Fed’s benchmark interest rate, the federal funds rate.
“The backdrop of low interest rates and a recovering economy will bring about an easing of terms, especially rates, as competition heats up,” McBride says. “We’ll see rates for both new and used car loans trending lower throughout the year, but at a snail’s pace.”
How much rates are expected to drop
Auto loan rates came down significantly in 2020. The average five-year new car rate started off the year at 4.60 percent and closed out the year at 4.22, while the four-year used car rate plunged to 4.88 percent from 5.33 percent.
The average 36-month used car loan finished the year at 4.57 percent, while the average 48-month new car loan fell to 4.22 percent.
Those steep drops — by 38 and 45 basis points, respectively — highlight just how quickly the U.S. central bank moved to backstop the U.S. economy when the coronavirus pandemic first took hold. The Fed cut interest rates to zero after two emergency rate cuts to help provide consumers and firms with cheap loans to get through the crisis while also hoping to prop up growth by incentivizing consumer spending.
If borrowing costs for 60-month new car loans indeed sink to 4.08 percent, they’ll be at their lowest level since early 2015, right before the Fed started hiking interest rates for the first time since the global financial crisis, according to Bankrate data. Four-year used car loans, which tend to track higher than six-year loans given their faster maturity, haven’t held at levels comparable to 4.75 percent since 2014.
One way to save: Look for used cars
The coronavirus pandemic has put the brakes on consumption, but many consumers have still been willing to dish out cash for cars, thanks to low interest rates.
The estimated average transaction price for a light vehicle in the U.S. reached $39,259 in November 2020, up 1.3 percent from a year ago though down 1.2 percent from the previous month, according to Kelley Blue Book, a firm that analyzes auto industry data.
The monthly moderation can largely be chalked up to consumer apprehension due to rising coronavirus cases, though average transaction prices are historically elevated. November is forecasted to be the third-highest month on record, according to Kayla Reynolds, industry intelligence analyst at Cox Automotive, in a statement accompanying the release.
“COVID-19 began its second surge with cases on the rise this past month and right before for the holiday season,” Reynolds said. “Consumer confidence has been faltering and unemployment remains stubbornly high. Still, consumers in the market for new vehicles are demonstrating an ability to pay premium prices.”
Used vehicle prices usually trend much cheaper, with a November report from auto industry firm Edmunds showing the average used-car price in October dipped to $15,874, a 3.3 percent decrease from September. Meanwhile, the average value for three-year-old used vehicles sank slightly to $20,401 in the month.
Purchasing a used car is a key way consumers might be able to save money when buying a car, especially given just how quickly new cars’ values depreciate.
Using Bankrate’s auto loan rate calculator, a $20,401 used vehicle financed by a 48-month loan with the forecasted rate of 4.75 percent would cost consumers $461 a month and $1,745 in interest throughout the life of the loan. That compares with a $724 monthly payment and $4,207 in interest on a $39,259 new vehicle with a 60-month term at the forecasted 4.08 percent borrowing cost.
Score a lower interest rate by focusing on your credit score
But the key to whether you’ll be able to score that forecasted rate is your credit score.
Generally speaking, the highest interest rates are reserved for those who might look riskier, based on their credit profile. According to data from Experian, the average annual percentage rates (APRs) on both used and new car loans were 20.67 percent and 13.97 percent, respectively, for individuals who have a credit score between 300-500. That compares with used and new car loan APRs of 4.08 percent and 3.24 percent, respectively, for those with top-tier ratings between 781-850.
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 history and frequently monitoring your report should be on your radar. You may also be able to call your lender and negotiate a better offer or loan term with your lender if you have strong credit but feel like your rate isn’t competitive.
How to save for buying a car
Bottlenecked manufacturing thanks to coronavirus-related shutdowns might also be lifting up new car prices. That means you might start to see prices trickle down again as factory floors open and ramp up production again, and could save quite a bit of money in the long run if you’re willing to be patient on making your purchase.
“It’s certainly not much of a buyer’s market right now: Inventory is still in short supply in certain areas, and automakers and dealers aren’t faced with the pressure to use big discounts to clear out their lots like they normally do at this time of year,” says Jessica Caldwell, Edmunds’ executive director of insights in a 2020 recap report. “Car shoppers who are a bit more price-sensitive might want to skip holiday shopping and wait until next year if they’re looking for big bargains.”
Meanwhile, Bankrate’s calculators and rate tables can help you figure out what your monthly payment with your specific loan terms will cost. Once you know, be sure to select a loan that fits with your budget and incorporate it into your expenses, along with savings for potential vehicle maintenance. All of that means cutting back on expenses as much as possible to make room in your wallet.