Whether you've finally obtained a long sought-after new job and want to upgrade your vehicle to better fit your professional image, or you're simply tired of playing the "will it start?" guessing game each morning as you leave for work, you may be investigating your vehicle purchasing options. While auto manufacturers have stepped up their efforts to make new (and certified used) vehicles available at a wider range of price points than ever before, with interest rates poised to increase in the near future, you may find getting an inexpensive loan to be a more challenging prospect than it has been during the Great Recession. Read on to learn more about your most affordable auto loan options, even during times when interest rates continue to rise -- as well as some loan products you may want to avoid while interest rates are climbing.
What auto loans are a good option when interest rates are rising?
Although it may seem like national interest rates are rising too slowly to make much of a difference in your decision, each small increase in the interest rate charged on any type of loan will affect your total purchasing power. This phenomenon was one of the reasons behind the Federal Reserve's efforts to keep interest rates low during the housing recovery; for the average home, a mere one percent rise in the interest rate charged can decrease purchasing power by as much as ten percent. As a result, keeping your interest rate as low as possible will not only minimize the amount of interest you'll pay over the life of the loan, but can allow you to get the most for your money by buying a car or truck that will hold its value even after you've paid off the loan.
When loan shopping, you'll first want to contact your local bank or credit union. Many of these smaller lending organizations offer more competitive rates than the national banks, and if you already have an established relationship with a specific bank or credit union in your area, you're more likely to qualify for the best offers and incentives. For those who are loan shopping without a specific vehicle in mind, make sure to check on any restrictions – for example, some banks may refuse to extend credit on vehicles that are more than a certain number of years old or that have high mileage.
Another good lending option when interest rates are rising is dealer financing. Because auto dealerships are often offered manufacturer incentives based on the number of customers who accept financing directly from the dealer, the dealership has a vested interest in getting you the best interest rate or terms available. In many cases, you may find that the dealership is able to slash the vehicle's purchase price significantly (reducing both your monthly payment and the total amount of interest you'll pay over the life of the loan) in exchange for financing through them rather than through your own bank.
What loans should you avoid during times of rising interest rates?
Adjustable-rate auto loans, while not as common as adjustable-rate mortgages (ARMs), are almost universally a bad idea when interest rates are poised to rise. Unlike most auto loans, which are fixed at a certain interest rate over the life of the loan (giving you an amortized monthly payment that doesn't change from month to month), adjustable-rate loans periodically reset or adjust to an interest rate that closely tracks the national average. While this flexibility can work in your favor when interest rates are low, taking out an adjustable-rate auto loan while interest rates are rising could leave you stuck with a heftier-than-expected payment on a rapidly depreciating asset.Share