Car Buying

What Rising Interest Rates Mean for Car Buyers

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author photo by Patricia Palermo August 2013

With rising interest rates increasing the long-term costs of student loans and mortgages, car shoppers may be wondering how the latest news in business and finance will affect the price of financing a new or used vehicle.

For now, the news is good. Many automakers are still offering historically low rates for new cars. Plus, leasing is an increasingly popular choice for new-car shoppers. Rates for used-car loans are holding relatively steady, too. Still, the climate remains uncertain. A rate hike on federal long-term debt could cause rates to climb. That could not only make borrowing more expensive for new-car buyers but actually make the vehicles themselves pricier, too.

If that happens, the historically low interest rates now available for financing new vehicles will climb, but the rise could be negligible. Right now, it's not uncommon to see automakers offering special promotional rates of 0 percent, 0.9 percent and 1.9 percent, provided the buyer has good credit. Overall, the average rate for a 60-month new-car loan is just above 4 percent.

For a 5-year $30,000 loan (after down payment or trade), the current average rate works out to a payment of $553.71. A borrower would pay $3,222.60 in interest over the life of the loan or $53.71 per month.

By comparison, buyers that choose 0 percent financing now will save more than $50 per month over the course of the same loan. A buyer that borrows at 1.9 percent pays $524.52 monthly. At these relatively low rates, a small bump doesn't cause a rise in payment that couldn't be offset through some clever household budgeting.

If rates rise sharply, the monthly cost of borrowing will jump sharply, too. At 6 percent, that same loan costs $579.98 per month. At 8 percent, it costs $608.29 -- more than $100 per month over the rate of a 0 percent deal.

For used-car shoppers, rates are higher than for new cars, but they are still relatively low. The average rate for a 3-year used-vehicle loan is now 4.67 percent. For a loan of $15,000 (after down payment or trade) that works out to $447.34 per month and a total of $1104.24 in interest costs over the life of the loan.

Of course, depending on whether buyers take advantage of an automaker's promotional rate or use a bank or credit union for financing, individual rates will vary. Buyers who borrow over a shorter term or put more money down can get lower rates. That will be true even if higher federal long-term rates push up auto loan rates.

Higher auto loan rates will not likely be the only effect of rising federal rates on the cost of a new or used car. Both new- and used-car dealers pay interest on their inventories. That means when the cost of borrowing is low, dealers can stock more vehicles. If the costs of maintaining inventories rise too steeply, used and new car dealers will trim the supply of cars on their lots. A smaller supply could lead to higher vehicle prices. Dealers could pass the higher inventory costs on to consumers, as well.

For now, shoppers hoping to finance a new or used car are fortunate to have very low borrowing rates. The difference between the lowest available rate -- 0 percent interest -- and the average rate is not huge. What the future holds is anyone's guess, but now is an exceptional time to finance a vehicle.

This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
What Rising Interest Rates Mean for Car Buyers - Autotrader