Why are some manufacturers offering rates as low as 0% on new cars, and other financial institutions offering rates starting from as high as 7%?
Looking back over the last 36 months, interest rates have been fluctuating at an unprecedented rate. We started off 2020 with auto loan interest rates hovering around 3-4%, then cratering to near bottom by mid-2021.
I don’t think anyone has ever seen as many 0% manufacturer finance offers as we saw during 2021 and 2022. On top of 0% financing, dealerships were also getting kickbacks from manufacturers to sell cars. And to add to the fire sale, every local credit union and national bank was offering rates around 1-2% in order to stay competitive.
This changed quickly at the end of 2022 when there was a sharp increase in the federal funds rate, which directly impacted auto loan rates, as well as rates on all other types of debt. Within 6 months, average auto loan rates on new cars for shot up from 3.85% all the way up to 7.7% for a five year loan (Source: Statista).
On a $40,000 car for a five year loan, that’s a monthly payment difference of over $70. That adds up to more than $4,000 in interest paid over the life of the loan.
That being said, the car market continues to prevail, and total car sales volume in 2023 was actually up slightly from 2022 (Source: Cox Automotive). Since the car market is still hot, let’s look at car financing.
One of the most important factors in all of this is the ongoing liquidity crisis among financial institutions (FIs). In a nutshell, several FIs purchased safe, low interest government bonds during 2020 and 2021 that don’t mature for another 7-8 years. At the time, it may have been a wise financial decision to park funds long term at low risk.
However, since interest rates skyrocketed in 2023, FIs are now fighting for liquidity as depositors are withdrawing their cash to put in money market funds, which tend to pay a higher rate than the savings account at your favorite bank or credit union. Since FI funds are locked in those bonds, they are struggling to keep up with the heightened rate of withdrawals. This led to the perfect storm with a few banks failures in March 2023.
In order to attract deposits, FIs have to keep dividend rates on deposits high. At a very basic level, in order for an FI to be profitable, they need to earn more from interest on loans than they pay for dividends on deposits. Thus, FIs who have greater liquidity on hand are able to offer lower interest rates on loans, since they don’t need to keep dividend rates high to attract deposits. This liquidity crisis has been affecting FIs of all sizes not just in the U.S., but globally as well.
The one common financing source that has remained a consumer favorite throughout all of this: credit unions. Dealers have been adding more and more credit unions to their arsenal of indirect lenders, because they realized they were losing big bank finance deals to the credit union down the street.
But why credit unions? Credit unions, by nature, are non-profit organizations. This means that credit unions are more focused on the member experience and providing valuable products and services to their communities. Credit union members benefit in the forms of lower loan interest rates, higher deposit dividend rates, and a more personalized experience when applying for products and services. However, some credit unions might not have the budget to pay for frictionless technology which is standard at most national banks.
Confused yet? Don’t be. Follow these tips when shopping for rates:
Shop around for the best rate. Call up several credit unions, both locally and national credit unions that you’re eligible to become a member of to shop for rates. Just because one credit union is offering you a rate of 7% doesn’t mean there aren’t other credit unions that can offer you a rate of 6%.
Don’t let the dealer pull your credit unless they confirm that there will be only one inquiry. Dealers are notorious for sending your loan application to all of the lenders that they work with, and before you know it, six different banks have pulled your credit. Get in writing the specific lender that is going to pull your credit.
Consider financing discounts on purchase price. If a dealer places a financing contingency on the deal that a discount can only be applied if you finance through them, run the numbers to make sure it makes sense to take the discount. Bonus points if you take the discount AND refinance with a different lender for a lower rate after a couple months.
Don’t accept the dealer’s first offer. If you have a quoted rate in writing from another lender, present that to the finance manager to see if they can match it or offer some other incentives to get your business. At the end of the day, 1 sale is better than none.
Find out if there are any manufacturer finance offers. If you’re buying a brand new car take advantage of any discounted rates available through the manufacturer. Lots of manufacturers are dealing with slow sales on EVs (e.g. Mercedes, Ford, Chevrolet) and are offering financing offers at 0.99% to 2.99%, which is considerably less than even the cheapest rate from a credit union.
Still have questions or want to chat about what financing route to take? Shoot us a message!
Carflux is here to ensure that you’re making the best possible financial decision, while securing a good deal on your new car. Our business is your betterment.
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