Throughout the financial crisis the majority of Americans hung onto their car, concerned that purchasing a new vehicle would add another payment to their monthly expenses.
However now with rates lower than ever and the economy showing signs of life, 2013 is being considered to be the ideal year to spring for a new automobile.
Greg McBride, senior financial analyst at Bankrate.com tells USA Today that, “We've never seen rates this low" coming from both banks and credit unions. McBride adds that even though low rates have lingered for a considerable amount of time, he doesn’t believe they’ve bottomed out yet.
As of mid-January, Bankrate.com reports that the average new auto loan rate was 4.15% for a five-year new car loan and 4.77% for a four-year used car loan.
But Where Do Low to Moderate Income Borrowers Go?
Although the deals and rates are available, not all borrowers are in the same position to obtain a loan. Hank Hubbard, president and CEO of Communicating Arts Credit Union ($34 million, Detroit, MI) says that in many cases consumers are unaware of the myriad of options on the market.
“We are a community development credit union serving the low to moderate income (LMI) population in the city of Detroit. 78% of our members have what is considered ‘subprime’ credit scores. Everything we do sort of goes through a low income/subprime credit filter.”
“There are two parts to obtaining a car loan in this segment,” Hubbard explains. “First, will I be approved and second, what are the terms?”
“The hard truth is that many of our members struggle with the first question so they accept whatever the second question is so they can get a car. It would be unusual for them to go to a bank at all, and it's been difficult to convince them to come to the credit union for the same reasons.”
Hubbard says that many LMI consumers often fall into the dealer trap before shopping around. “I think they simply buy a car from the dealer/lot who will give them a loan. When they do look at terms, the focus is on payment. If they think they can afford the payment, then the number of years, fees, extras are secondary.”
“So in our case, members that have had car loans with us will come to us ahead of time. Trying to convince others to come to us first hasn't usually been successful. We get our new car loans by refinancing existing member loans.”
Auto Loan Shopping Tips
Hubbard says that above all, members should know that they do have options before signing a dealership loan and that there is a better deal elsewhere. “The other thing they should know is that refinancing the deal after it's closed is a possibility as many people don't realize they can refinance their car loan,” he adds “They should also have an idea of the market value of the car they are purchasing. We also see people of modest means paying way too much for a vehicle, presumably because they don't know they have options.”
Additionally, Bankrate.com says that unless your credit is blemish-free, consumers should dig in and look for ways to improve scores before seeking an auto loan. Comb your credit report for inaccuracies or out of date line items that could be putting a ding in your rating.
Also, compare several lenders before going with one that will work best for you. Remember--sometimes the lowest advertised rate may not be your best option (due to fees, terms or conditions) or you may simply not qualify. Bankrate.com suggests visiting a credit union before making a final decision as consumers may find a better deal and situation.
Motor Trend offers some “insider” advice to anyone looking for a vehicle:
- Paying cash won’t necessarily get you a better deal. In the “old days” (up until the early 1980’s) car dealers would have to jump through hoops to document financing due to lack of computerization, whereas cash customers were easy--thus they often received a better deal. Motor Trend says that old adage no longer applies and auto dealers would rather have their customer finance a loan because they make some dough off the financing.
- Buying a new car is not a bad idea. Every car owner has heard the comment, “your car will depreciate the minute you drive it off the lot.” Motor Trends says that regardless of whether you buy new or used, you can’t avoid depreciation (unless you purchase a classic car). Since no one tries to sell their car the day after its been purchased, depreciation is all relative.
- Having your credit report pulled won’t kill your credit. Many buyers worry when they are told to review their credit report for fear that pulling their credit will negatively influence their score. Motor Trend says that unless you are pulling your credit three times weekly for the next six months, borrowers should not worry. As long as the borrower doesn’t constantly check his or her credit report, a credit check should not make the score tank.
The Credit Union Difference
Hubbard explains how credit union loans have many advantages over other loans. “First off, the rates and terms are set with member's needs in mind (rather than owner or stockholder needs) and therefore tend to favor the borrower.”
“Second, and this is especially true with LMI members, it helps to build a comprehensive relationship with the credit union,” he continues. “The more a credit union can learn about a member's financial habits, the easier it is to make a loan decision. Credit unions look behind the credit score, if there is nothing else (no prior history) with the member it's not a negative - but we are left with score and income.”
Hubbard says if there is a positive history and a person is on the approval line, it would influence the decision. “Third, it's just easier to have all of your financial business in one place - facilitating transfers, etc.”
Plenty of credit union deals are available in 2013. Associated Credit Union ($1.2 billion, Norcross, GA) is offering 2.13% APR for up to 60 months on new (2013) vehicles throughout January.
Contact your local credit union for the latest auto loan deals and rates.