September car loans remain surprisingly cheap
Even though the Federal Reserve began pushing short-term interest rates higher in December 2015, financing a car or truck remains quite affordable. Car loan rates are staying low.
In fact, the average cost of new- and used-car loans is only around one-tenth of a point higher than they were in September 2015.
Most buyers will pay only a few dollars more per month than they would have back in 2013, when interest rates fell to record lows on virtually every type of auto financing.
Car companies are also offering cut-rate car loan rates — typically 0% to 2.99% — on a slew of 2016 models.
Buyers with reasonably good credit can qualify for that discount financing or pay considerably less than average for a regular car loan.
Search our database of the best auto loan rates from dozens of lenders in your area to see if you can find a better deal.
Finding the cheapest possible financing is increasingly important as the size and length of new-car loans continues to grow.
Average car loan rates for September 2016
Source: Interest.com weekly survey from September 7, 2016
|Type of financing||Interest rate|
|36 months new||4.14%|
|48 months new||4.16%|
|60 months new||4.19%|
|36 months used||4.62%|
What to expect when getting a loan
The average new-car loan rose to $30,032 during the first quarter of 2016, up more than 4.6% over the past year, according to Experian, one of the three major credit-reporting agencies.
The average loan term has also grown to a whopping 68 months, committing borrowers to longer repayment plans.
Of course, how much you'll pay, or whether you'll get a loan at all, is heavily dependent on your credit score.
But it's just as easy to finance a new ride now as it was before the financial crisis and recession.
Back in late 2007, the average borrower had a credit score of 711, according to Experian.
(All of the credit scores provided by Experian are based on the Vantage 3.0 scoring system. The scores are similar, but not identical, to those created with the more popular FICO scoring system. Both now grade creditworthiness on a scale of 300 to 850.)
As delinquencies and repossessions soared during the downturn, lenders made it harder to get a loan.
By the time the recession ended in 2009, the average score had risen to 738. But in the first quarter of 2016, it was back down to 710.
During the first quarter — January through March — the average cost of new-car loans for borrowers with the best credit (what the industry calls "prime" borrowers with credit scores of 661 and above) was 3.29%.
Discounts from carmakers
Borrowers with excellent credit are eligible for lots of juicy discount loans that carmakers offer through their lending divisions, such as GM Financial and Honda Financial Services.
At least five brands are offering 0%, for as long as 72 months, on a slew of 2016 models this month.
Even more cars and trucks are available with special 0.9% to 2.9% loans.
Buick, for example, is offering 0% financing for up to 72 months, plus $750 bonus cash, on its Enclave, a luxury SUV. Volkswagen is offering 0% financing for up to 60 months on its Tiguan, a compact SUV.
Our Rebate vs. Low-Cost Loan calculator can help you make the right choice and save the most.
Click here to find all of the current automaker incentives.
The subprime loan market
About 1 in every 5 auto loans is made to a borrower with poor credit.
Those car buyers already pay three to four times more to finance a new car or truck.
The average cost of subprime loans (credit scores of 600 and lower) was 11.03% in the first quarter 2016.
Rates started to increase after a story in The New York Times alleged that lenders were up to their old tricks, offering subprime borrowers high-cost loans they really couldn't afford.
That prompted the U.S. Department of Justice to launch an investigation into subprime lending practices.
Federal prosecutors have subpoenaed the records of five lenders — General Motors Financial, Santander Consumer USA, Capital One Financial, Ally Financial and Consumer Portfolio Services.
Then the State of New York launched a probe into possible abuses by seven major subprime lenders — Ford Motor Co., Honda Motor Co., Hyundai Motor Co., Nissan Motor Co., Santander Consumer USA Holdings, Toronto-Dominion Bank and Volkswagen AG.
That growing government scrutiny has caused lenders to be more cautious about subprime financing.
Wells Fargo, for example, is now limiting subprime loans to 10% of its auto business, while PNC Financial Services Group is avoiding subprime lending altogether.
Fortunately, the market seems to be stabilizing.
"Credit scores are flattening out for new-vehicle financing and more prime consumers are shifting to used, which is helping increase the average score there as well," Melinda Zabritski, Experian's senior director of automotive finance, said in a statement.
And overall, there's lots of money to lend on cars and trucks.
Outstanding balances on car loans reached an all-time high of more than $1 trillion in the first quarter 2016, the first time on record, according to Experian. That's more than the $925 billion we owe on our credit cards.