Auto loans just keep getting cheaper and easier to find

Car keys on loan application

Good credit. Bad credit. We've never seen auto loans this cheap.

Lenders are awash in cash and eager to lend it for new cars. Even if your last purchase was just two years ago, you'll be shocked by how much interest rates have plummeted.

On average, borrowers are now paying around 4% for 36-, 48- and 60-month loans from banks and credit unions, according to our most recent survey of lenders.

That's down from over 6% in 2011.

Although it doesn't sound like much, that 2% difference will save you some serious cash.

If you borrow $20,000 at 6% for 48 months, you’d have a monthly payment of $470 and pay more than $2,500 in interest over the life of the loan.

Borrowing the same amount at 4% cuts your monthly payments to about $450 and reduces your interest cost to less than $1,700.

It works out to a savings of about $840, or the cost of a 50-inch flat-screen TV at a big-box store.

Most borrowers are doing much better keeping current with their car loan payments, and in large part we have that to thank for the lower rates.

When the 2009 recession struck, delinquencies and repossessions skyrocketed. Lenders slammed the brakes on new auto loans.

But, according to credit data expert Experian, the number of bad auto loans has steadily declined over the past three years.

That has prompted lenders to resume making loans, at lower and lower rates, even to borrowers with poor credit.

Credit scores are a snapshot of a borrower's creditworthiness. The higher the score, the lower the risk to the lender.

A drop in the average auto-loan credit score would indicate lenders are loosening their credit qualifications for auto loans and lending to borrowers with less than perfect credit.

Before the recession, in the fourth quarter of 2007, new-car borrowers had an average credit score of 749.

It shot up to 775 in 2009, as lenders avoided riskier loans, backing away from all but the most qualified borrowers.

Average credit scores for auto loans have been steadily dropping since 2010. At the close of 2012, the average auto loan credit score dipped to 755 — almost back to pre-recession levels.

Moreover, Experian reported that in the fourth quarter of 2012, lenders increased auto loans to borrowers identified as deep subprime, with credit scores below 550, by 31% year over year.

Auto loans to subprime borrowers, with credit scores between 550 and 619, increased by more than 11% over fourth quarter 2011.

Last year, one out of every four new-car loans went to a borrower with a below-prime credit score of 679 or lower.

Fun fuel sipping cars

Sure, hybrid and diesel-powered cars get great mileage, but they cost more to buy. A lot more, in many cases. That's why we think a traditional front-wheel-drive compact or subcompact with an efficient four-cylinder engine is a better gas-saving alternative for many buyers. Our six favorite fuel-sippers for 2013 get more than 30 miles per gallon in combined city and highway driving yet cost no more than $20,020.

Not only will borrowers — regardless of credit score — find auto loans easier to get, but the money they borrow will cost less.

Those borrowers with below-prime credit scores have all seen their interest rates drop.

Deep subprime had the largest decrease of any category — nearly a full point, to 12.47% — since the fourth quarter of 2010. At 9.41%, subprime posted close to the same drop.

Savings are coming all along the good-credit/bad-credit spectrum.

Highly qualified borrowers with a credit score above 740 averaged a 2.98% interest rate toward the end of 2012.

Then there are all of the discount loans carmakers offer through their lending divisions, such as Ford Credit and Chrysler Credit.

We recently counted more than 100 deals offering 0% financing on 2012 and 2013 models across 20 brands. Another 50 models had promotional financing of less than 2%.

Qualifying for such manufacturer-sponsored deals can be difficult. If your credit score falls below 680, don't be shocked if you are turned down.

Whether auto-loan interest rates can go even lower yet is anyone's guess. Obviously the downward trend can't go on forever; but for now, they are a huge bargain and good news for anyone financing a car.

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