In the market for a car? First shop around for loan rates
Rates for car loans have increased significantly since early 2022, with an average annual percentage rate of 7.1% for new-car buyers in January 2024, according to Edmunds.com.
If you locked in a low rate in the past few years, you may want to hold on to your car for longer than originally planned.
“With the way that car prices and car interest rates have gone up, it has really changed the calculus for a lot of folks as to what they can afford,” says Matt Schulz, chief credit analyst at LendingTree, an online lending marketplace.
If you’re in the market to buy a car, you may still have some low-rate options if you shop around because rates can vary wildly, says Ivan Drury, director of insights for Edmunds.com.
“It’s a mix of the car you’re buying, the bank or credit union you use — and the incentives the dealership has,” Drury explained.
Some dealers offer low rates on loans for cars that are harder to sell. Michelle Morris, a certified financial planner with BRIO Financial Planning in Quincy,
Massachusetts, says one of her clients recently received a dealer-financed loan with a rate of 3.99% for a new Mini Cooper.
Search for vehicles that have been on the market for a while, Drury says. “Vehicles tend to get redesigned every five to six years.”
Especially for a car that’s in a popular sector of the market, you can often get incentives by purchasing a model that was manufactured within the final couple years of the redesign window.
He recommends getting a preapproval from your bank or credit union before going to the dealer because your dealer may try to beat that rate.
The low rates dealers advertise are usually for a 48-month loan, and rates may be higher for a longer-term loan.
For example, a 48-month loan may have an interest rate of 2.9%, compared with a rate of 3.9% on a 60- or 72-month loan, Drury says.
Though a longer-term loan will provide lower monthly payments, you’ll pay much more in interest over time.
In addition, at some point you could end up owing more than your car is worth — known as being upside-down on your loan. That could be a big problem if your car is totaled and your insurance payout doesn’t cover the balance on your loan.
Having a good credit score could reduce your rate by up to 2 percentage points, says Mari Adam, a certified financial planner in Boca Raton, Florida.
You may also be able to shave off a halfpoint by signing up for automatic payments.