March 10, 2011 in Business

Interest rates drop on auto loans

Easier to secure for subprime borrowers
Dee-Ann Durbin Associated Press
 

DETROIT – As car buyers head back into dealerships after a two-year drought, they’re being greeted by rock-bottom interest rates on auto loans, eye-popping lease deals and a renewed willingness to lend to people with spotty credit.

Banks are on firmer financial footing, helped by government aid and renewed demand for auto loans that are packaged and sold as securities, a market that raises money and allows banks to write more loans. Buyers, too, are gaining confidence. U.S. auto sales rose 20 percent in February to the highest monthly pace since Cash for Clunkers in August 2009.

This month, General Motors, Chrysler, Ford, Nissan and others are offering zero-percent interest rates on auto loans. Luxury makers such as Acura and Cadillac have lease deals with zero-percent down. Banks have cut their interest rates on auto loans in half.

Here are some reasons for the great deals:

• Lower rates. Buyers are paying an average annual percentage rate of 3 percent for new cars financed in February, down from nearly 4 percent in the same month a year ago, says auto research site Edmunds.com. That’s one of the lowest rates since before the economic downturn.

• More loans for subprime borrowers. Unlike much of 2010, when the auto loan market was open mainly to buyers with the best credit, people with weak credit histories now are having an easier time finding loans because of the competitive market. The percentage of new-car auto loans going to subprime buyers – generally those with credit scores below 680 – rose 18 percent in the last three months of 2010 compared with the same period the year before, according to Experian Automotive.

• Better leasing deals. Leasing is making a comeback. That’s a boon for people seeking lower monthly payments on a car or truck. Leases made up a quarter of new-car transactions in February, Edmunds says.

Interest rates are likely to stay low this year, as the economy continues to recover. That will help keep loan terms attractive. Competition also remains fierce among car companies. GM said earlier this month that it expects to dial back on lease deals and other incentives as the year goes on, but it could keep them in place if it faces too much pressure from rivals.

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