The trend toward securitization in automobile loan financing is eroding the previous link between car loan interest rates and other interest rates.
In the past there was a very strong correlation between these rates.
For example, for the three years ending in December of 1996, the four-year borrowing rate for new car purchases rose 130 basis points, from 7.92 percent to 9.22 percent. During the same period, the four-year Treasury rate (computed from three- and five-year Treasury rates) rose 120 basis points, from 4.79 percent to 5.99 percent.
This close correlation in interest rate movements evaporated in 1997 and early this year as the move toward securitization in auto financing accelerated.
For the 13 months ending in January, the four-year Treasury rate fell 85 basis points, from 6.25 percent to 5.4 percent. At the same time the four-year auto loan rates declined only 5 basis points, from 9.3 percent to 9.25 percent.
Milton R. Joseph, a New York banking analyst who has studied the trend, noted that auto loan securitization has jumped substantially, increasing 78.7 percent to $51.1 billion for the five years ending in December 1996.
“Securitization is a big factor in auto loans,” he said.
Lenders now have a wide spread of interest rates that they charge for car loans, depending on a person’s previous credit history.
In order to avoid unnecessarily high interest rates, consumers should do everything they can to develop a good credit history. Beyond that, it is more important than ever to examine credit reports — which are frequently available for free from lenders — to ensure that there are no mistakes that would result in getting charged a higher interest rate, Joseph said.
“You want to make sure that your credit report is accurate. Make sure there’s nothing adverse on the credit report that’s not true,” he said.