You just read that new auto loan rates are averaging around 2.54% for 60 months but were just assigned a rate that isn’t even in the same neighborhood.
What gives? You've paid your bills and thought you maintained a pretty decent credit score so why aren’t you getting a rate even near what’s reported as an average?
According to Dave Ledwell, vice president of credit card and consumer lending at Navy Federal Credit Union ($54 billion, Vienna, VA), a number of factors come into play, beyond credit score to determine the rate.
"Providing affordable auto loans that fit each member's budget is what we do every day for our four million-plus members,” he tells Credit Unions Online. “We determine a member's rate, currently as low as 1.49%, through a number of ways, including their income level, credit history and credit score. At the same time, everyone is a first-time auto buyer at some point in their lives. We're understanding of the fact that our younger members, especially those serving in the military, may not have an established credit history. Taking that into consideration, it comes down to working with each member and offering a low-interest loan they can afford."
Wait. Ledwell mentions that rates at Navy Federal Credit Union are as low as 1.49%, far below what’s considered to be the national average. According to Mike Schenk, senior economist at Credit Union National Association, a 60-month loan at a credit union can be considerably lower than what you might find from other lenders.
He describes a scenario where the consumer finances $30,000. Schenk says that if the average credit union is offering around 2.73% versus 3.98% at a bank, “Over the life of the loan that's about $1,000, and $1,000 is not chump change.”
“I think it's also true that because we're member-owned, we're very careful about not saddling members with loans they can't afford,” he adds. “If you look at delinquencies and charge-off rates, mortgage brokers really were saddling people with mortgages that never should have been written.”
“With all of the business that we do, we're careful about who we loan to. That doesn't mean we choose only the best qualified. On the contrary, we tend to be smaller institutions, locally owned and controlled by the membership. We're more likely than the big national banks to sit down and hear our member's story.”
Why the Preapproval is Important
Most loan experts suggest that auto shoppers should first explore several lenders and get pre-approved before they step into a dealership or lot.
In a release, BFG Federal Credit Union ($164 million, Akron, OH) explains that being pre-approved lets you, “Know what’s affordable from the start: With a pre-approval for a used or new car loan, consumers know right from the start what’s affordable for them. There’s no guessing game at the dealer, and there’s no getting wrapped into a deal that really isn’t workable financially.”
Additionally, the credit union contends that outside lenders typically offer lower rates so you can focus on the price instead of getting the lowest rate. This allows you to also operate like a cash buyer because you have that pre-approval in your back pocket. In the release, BFGFCU adds that its current auto loan rates are as low as 1.99% APR.
Other Factors to Consider
Andrew Schrage, founder and CEO at Money Crashers told GoBankingRates.com that credit score counts. “A great credit score is usually considered to be 750 or above,” he says.
Schrage adds, “The next thing lenders look at is your debt-to-income ratio. This is the percentage of your income that goes towards things such as rent or debt payments.” The amount should be, “less than 36 percent to qualify for any loan, but the lower the number, the lower the auto loan interest rate.”
Cars.com rounds out the factor list by adding that a new car typically warrants a lower rate, lower terms are favorable and where you get the loan can make a difference.
“Shop around for a good interest rate before returning to a dealership,” Cars.com suggests. “Credit unions are a great option; while they're perceived as exclusive, their interest rates are typically lower than many banks and they're more likely to examine a subprime applicant's circumstances and make exceptions if problematic credit history results from one-time medical expenses, unemployment or divorce.”
Finally, strategy can work in your favor. A vast majority of credit unions hold auto loan sales throughout the year so if you aren’t in dire need of a replacement or new vehicle immediately, hold out until your credit union offers something like what IBM Southeast Employees’ Federal Credit Union ($800 million, Boca Raton, FL) is currently promoting.
IBMSECU members can attend one of the on-site car sales toward the end of September to capitalize on both rate and price. The two-day sale features hundreds of specially priced cars and trucks, three month payment deferment, free two year maintenance on new vehicles and a bonus $100 gas card.
Contact your local credit union and inquire about current or future auto loan sales that may both lower your rate and price.