Expect auto loans to cost 8% by the end of summer

Percent sign on windshield

Plan on paying more for auto loans this summer but not a lot more.

The average rate for a five-year new car or truck loan jumped from 7.88% to 7.93% this week and we expect it will continue on up to between 8% and 8.3% over the next couple of months.

That would still be less than a percentage point higher than two years ago, when interest rates for all types of consumer loans began to climb.

And it's a far smaller increase than we've seen for mortgages, home equity loans, credit cards and other debt.

Interest rates are going up because consumer prices are rising faster than they have in a decade.

Inflation like that is what prompts the Federal Reserve to boost interest rates for everything from mortgages and credit cards to auto and business loans, in an effort to slow spending and hold down prices.

After increasing rates a quarter-percentage point 16 times since June 2004 consumers might have hoped the Fed would ease up this summer.

But despite all those rate hikes inflation is running at an annual rate of 5.2% for the first five months of the year -- considerably higher than the 3.4% increase for all of 2005.

The Fed couldn't ignore that and so it raised rates a 17th time late last month.

Now we'll have to see whether prices rose more slowly in June and hope the Fed committee that makes these decisions doesn't raise rates again in August.

Interest.com's latest survey of lenders found the average cost of a:

At present rates, your payment on these loans (based on borrowing $25,000 for a new car and a $10,000 for a used car) would be:

The popular five-year new-car loan offers the lowest monthly payment generally available, but it also costs the most, as it comes with the highest interest rate.

It does, however, give the buyer an opportunity to purchase a more expensive car than might otherwise be possible, or keep car payments within limits of a restrictive budget.

You should know the current rates before you go car shopping.

If it's possible to take advantage of a super cheap financing deal from one of the automakers, that's great. You won't do better than 0%, or 0.9% or 1.9%.If not, there's a very good chance that you can find a better rate than the dealer will offer you.

And you certainly need to protect yourself from finance-charge markups.That's where the dealership adds 3 percentage points sometimes more -- to the interest rate one of its lenders is willing to charge you.

The dealer doesn't have to tell you that you could get a lower rate elsewhere and the practice is perfectly legal.Here's how it works: You apply for a loan through the car dealership, which sends your information out to four of five finance companies it regularly works with.

They check out your credit history and come back with an offer.

The best says you're eligible for a loan with an 8% annual interest rate.

Only the car dealer tells you the rate is 11%.On a $22,000, five-year loan, that extra 3% adds $1,935 to your payments.

The lender collects the money and sends anywhere from half to all of it back to the dealer.

To look for the best auto loan rates in your area click back to our auto home page and use our rate search at the top of the page.

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