What to Know Before Getting an Auto Loan

Over the last couple of years, seismic shifts in the automotive landscape have left many car buyers scratching their heads. Trying to understand the best, most cost-effective way to secure a loan for a new or used vehicle can be daunting and overwhelming even in the best of times, but when faced with supply chain shortages, record low interest rates on loans, unprecedented demand, and a dearth of dealer incentives, it can feel downright impossible. In this article, we will explore the current automotive landscape, things to consider before pursuing a loan, and tips on where and how to find a deal when taking out a loan for your next vehicle.

  

LOW INTEREST RATES… BUT FOR HOW LONG?
As we write this, Americans are experiencing historic low interest rates for home mortgages and auto loans, but experts predict those rates will begin to rise soon. The Federal Reserve has indicated it will begin to raise interest rates starting in March 2022 and when they do, consumers can expect interest rates on auto loans to rise as well. Some banks estimate anywhere from 5 to 7 interest rate hikes by the Fed, with most predicting the Fed will raise rates at each of their remaining meetings in 2022.

  

  

SUPPLY CHAIN & INCREASED DEMAND
Well-publicized supply chain shortages, particularly on semiconductors, has meant manufacturers cannot build the vehicles needed to meet increased demand from consumers. Couple those challenges with tangled logistics routes, a nationwide labor shortage, and spiking COVID-19 rates, and multiple manufacturers have had to halt or significantly reduce production over the past 12-24 months. This has resulted in empty showrooms, long lead times for new vehicle purchases, lackluster dealer incentives, and inflated prices on both new and used vehicles.

  

  

WHAT DOES ALL THIS MEAN FOR AUTO LOANS?
If you are in the market for a new or used vehicle, you may be asking, What does this all mean for my next auto loan? The answer to that will depend on multiple variables, namely how soon you plan to buy, your credit score, and the size of your down payment.

Those looking to buy immediately (in the next 1-2 months) can expect to lock in historic low interest rates, however supply shortages and few dealer incentives may mean a low interest rate is the only “deal” they are able to secure on their purchase. Buyers may also find themselves forced to settle on a make, model, or finish they did not originally want simply because it is the only vehicle the dealership had in stock at purchase. Buyers in the market to purchase now would do well to put as much money down as possible and ensure their credit score is stellar to grab that low interest rate.

Consumers on a longer timeline who are looking to buy in the next 6-12 months should expect supply chain issues to be less severe, a greater availability of the makes, models, and features they want on premises at dealerships, and the possible reintroduction of dealer incentives to sweeten the deal. Prices on new and used vehicles should come back down to Earth as well, with the Fed working to ease inflation. However, buyers can also expect elevated interest rates on their auto loan as multiple interest rate hikes run their course.
 

  

GET YOURSELF PREPARED
The good news is that despite challenges in the automotive and financial markets, the time-tested methods to secure a competitive interest rate on a loan remain the same. Buyers can expect better interest rates if they bring a solid credit score and a sizeable down payment when they are ready to purchase. For some, this may mean engaging a credit monitoring service to help bring up their credit scores.

It is also always a good idea to shop around for your auto loan. While a dealership will be more than happy to handle financing, buyers would do well to explore their options with their own bank or third-party financial institutions beforehand. Understand that a dealership is just the middleman in the auto loan process, which means they will mark up their services and pass the cost onto you. The more middlemen you can eliminate in your auto loan process, the more money you will wind up saving overall. Taking the time to fully explore financing options can save thousands of dollars over the course of a loan and our experts are more than happy to walk you through the process to secure the best deal. You take the time to shop for the best deal on a vehicle, why not do the same for your loan as well?