Interest rates on new-car loans tend to move in lockstep with the prime rate. As the Fed has cut rates, the prime rate has dropped and rates on auto loans from financial institutions have followed suit. Not all car loans are tied to the prime rate, however. Even with a drop in interest rates, few banks and finance companies can match the deals available from captive finance companies of auto manufacturers, such as Ford Motor Credit and General Motors Acceptance Corp. Thus, if you’re arranging financing for a new car, don’t ignore dealer financing, especially now that auto manufacturers are offering deals in an attempt to bolster sales.
If you have an outstanding car loan, consider refinancing. Used-car loans are slower to follow the prime rate’s moves but they generally change in a month or two. Current rates on three-year used-car loans are just under 10%, higher than the rates on 48-month new-car loans (around 9%) but a 10% used-car loan may save you money if you have a higher-rate new-car loan in place.
