06/18/2024
Just how much does your credit score impact your interest rate? Here’s a snapshot of average auto loan interest rates by score range. Data was compiled by Experian from Q4 of 2023. Average new car rates being 7.18% and used cars being 11.93%.
What does this mean? Well, buying out your lease is considered buying a used car meaning you will probably have a slightly higher interest rate. It also means that your buying power is not the same as it was even 2 years ago. It also is having an effect on used car values meaning your expiring lease most likely doesn’t have any equity. A return to the norm for heavy lease markets like Detroit where employee and supplier discounts are almost expected by every consumer.
How can you benefit from higher rates? Leasing is a good way to avoid high rates. Finance charges with leases are often subvented by the manufacturers as a way to encourage lease sales and keep production numbers high as you get a cyclical consumer. As a lessee you are more than likely going to remain inside the manufacturer warranty for the duration of the lease meaning your ownership costs are fixed. No surprise repairs or maintenance costs besides some oil changes and filters and tire rotations. You also insulate yourself against market corrections. When the lease is over, you have no penalty if the bank got the residual wrong and the car is valued well below that number. You move on to your next car.
Leasing of course isn’t for everyone, credit requirements are typically stronger, so the lower end of near prime and below may not qualify in some cases. So how do you combat high interest rates. First and foremost shop within a budget that you can manage. Secondly while a car isn’t necessarily an asset you still need to protect it as such. A service contract or extended warranty is always a solid way to shield yourself from unexpected repairs helping keep your budget unaffected. Third is GAP insurance or Guaranteed Asset Protection, in a total loss event if your car is valued by your insurance company for less than the balance of your loan you are still responsible for the difference to pay off the loan. Many people don’t put money down on loans today, even including their taxes and state registration fees into their loans. You are almost guaranteed to be in a negative equity position for the first several years of your new or used car loan in that situation. GAP insurance protects you from that. Finally be prepared to refinance your loan! For buyers who are in the subprime and near prime, get to know your credit report and make steps to improve your score. After about 6-12 months of consistent on time payments look to refinance the car with your bank or credit union to lower your interest rate. This can lower your payment or allow you to even shorten your loan term. I personally never recommend extending the loan term past your original purchase loan length. For example: original loan of 72 months, refinance after 12 months. New loan should be no longer than 60 months. This keeps you in line to pay the car off or get into an equitable situation to still trade the car in reasonably during your loan term. For the prime and super prime buyers, refinancing can still be your friend if you see a promotion from your bank or credit union or you simply see a drop in rates. My same suggestion applies to your loan term targets. The goal is to pay the car off and reduce your interest paid.
