Interest rates on new car loans have hit high levels not seen since 2010, driving up the need for consumers to work a little harder when shopping for the best deals.
The average rate on a new car loan was 5.2% in February — up from an average 4.4% in February 2013, according to Edmunds.com. Average rates had fallen as low as 3.9% back in December 2012 — down from 5.3% in February 2010. Figures are based on financing completed at dealerships.
What's more startling: Only 31.6% of consumers who bought or leased a new car even bothered to negotiate a car loan rate, compared with 76% who negotiated the price of the car or truck, according to a Federal Reserve survey of households in 2015.
And 11% of borrowers do not know the interest rate on their car loan, according to the Fed survey.
We're not seeing the worst rates — nothing even close to the average 8% for a car loan consumers faced in January 2006, according to Jessica Caldwell, executive director of industry analysis for Edmunds.com.
But many consumers will end up spending more money to buy a new car or truck this year, as financing costs go up and automakers try to hold the line on incentives.
The average payment hit $527 a month in February, up from $462 five years ago, according to Edmunds. Consumers are buying pricier SUVs and trucks, borrowing more money and taking out longer-term loans.
Borrowers will be running into higher rates across the board in 2018, if forecasts prove true.
The Federal Reserve is expected to raise rates by 25 basis points at its next two-day meeting ending March 21. If the Fed moves as expected, its benchmark interest rate would move to a range of 1.5% to 1.75%.
"There is a strong likelihood that we will see at least two more fed funds rate hikes this year after March," said Robert A. Dye, chief economist for Dallas-based Comerica Bank.
Dye expects three quarter-point hikes at the Fed meetings in March, June and September.
"The odds of a fourth rate hike this year, coming on Dec. 19, are increasing," Dye said.
How do you find the best deal on a car loan? Here are some tips to consider:
1. Do not dwell only on the car payment
It might seem responsible to begin shopping by thinking you can afford $300 a month for a car. After all, looking at the monthly payment is how you decide to buy a cell phone or sign up for Netflix.
"People start with the best intentions for setting up a budget," Caldwell said.
But car deals can trick you with hidden costs tucked into a monthly payment that ultimately will boost what you're paying in the long run for the car.
Caldwell said a car dealer might help you get a lower monthly payment by extending the term of that car loan, for example. Yet if you're taking out a six-year or a seven-year car loan, you're spending more money overall and taking on the risk that you'd still owe money on the car if you need a new one in three years.
The average car loan was for 5 years and 9 months for new cars financed at dealerships in February, roughly three months longer than the average new car loan was five years ago, according to Edmunds.com.
The amount financed jumped to $31,313 in February from $26,700 five years ago for a new car loan, according to Edmunds.com.
Dragging out a car loan — and taking on more debt — may be the only way that some consumers can get into a popular, well-equipped truck or SUV. One less-popular option to control costs: Opt for a lower-priced vehicle.
2. Know your credit score before you car shop
A higher credit score means a lower interest rate. Make sure to get a free copy of your credit report long before you apply for a car loan to have enough time to dispute any errors or incorrect information that may be dragging down your score.
To boost that score, you'd also want to pay down credit card balances, particularly if you can get the balance below 10% of the credit line, said Greg McBride, chief financial analyst at Bankrate.com. If you have a $2,000 line of credit, you'd want the balance below $200 if possible.
Obviously, you don't want to take out new loans right before you're shopping for a car.
3. Take time to shop for a car loan
Many consumers do not go online to even review going rates for car loans before they talk to a dealer about financing.
"Most car buyers just take whatever rate they're given," said Miron Lulic, founder and CEO of SuperMoney, a tech startup that has an online platform to compare auto loan rates.
But he said car shoppers should ask for a better rate. A $35,000 five-year car loan with a 7% annual percentage rate will cost you roughly $3,800 more than the same loan with a 3% APR.
Rates can be all over the map.
McBride said tough competition for car sales has put some limits on increases in rates, even after a string of rate hikes by the Federal Reserve.
Some lenders are marketing rates of 3.39% to 3.99% on three-year car loans. Promotional rates at banks on five-year car loans are around 3% to 4.5%, according to Bankrate.com.
McBride noted that the average rate being marketed by banks for five-year car loans is 4.53% now, compared with 4.36% a year ago.
4. Run the numbers in any deal
Opting for the lowest interest rate offered at a dealership isn't always the way to get the best deal. Sometimes, you could be better off taking a car loan with a rate of 4.94% instead of a 1.9% special rate offered on a specific car at a dealership, according to research by Cox Automotive.
The reason: What kind of rebate or incentive could you be giving up to get that 1.9% special rate?
Take, for example, one recent promotional rate on a 2018 Ford Fusion SE. To get the 1.9% rate, you'd lose a $3,000 incentive, according to Cox's research. As a result, you might need to borrow an extra $3,000. If so, the overall cost would be about $1,100 more if you opted for the 1.9% rate, instead of a rate of 4.94%.
Another tip: Your savings could be even greater if you found an interest rate in the 2% to 3.4% range at a local credit union — and grabbed the $3,000 incentive.
Another tip: Ask if you can get a better rate if you put more money down.
Auto industry experts expect that 0% promotional rates will continue to be offered, even as interest rates edge higher in 2018. After all, a 0% rate on a TV ad can drive traffic.
Roughly one in five car buyers can still find loans with interest rates between 0% and 2% through financing at a dealership, according to Edmunds.com.
But 0% or 2% isn't always the best deal if you can find a low rate elsewhere and obtain a rebate instead at the dealership.
5. Shop for car loan rates at credit unions
See what types of rates are being offered by a local credit union, even if you're not a member, suggests Charlie Chesbrough, senior economist for Cox Automotive. You might find its easy to become a member, if you want a car loan.
"Many credit unions have been aggressively lending into the auto market," Chesbrough said.
Chesbrough said shoppers should talk to different dealers about options for getting a lower rate, as many dealerships may know of lenders who are actively promoting car loans for borrowers who have less than perfect credit. Consumers need to ask plenty of questions.
"They have to be very diligent in their shopping," Chesbrough said. "There are other offers out there that they do qualify for."
Contact Susan Tompor: firstname.lastname@example.org or 313-222-8876. Follow Susan on Twitter @Tompor.