Car loan rates

[ruleof72]

I bought a used car last week and was completely shocked at how low the rates were. My intent was to use my 5% HELOC (a la 2004 ) to finance the car but the dealer mentioned that someone with great credit can get rates in the low 3% range. Sure enough, they got me 3.14% for 72 months.

How is it that auto loan rates are now so much lower than mortgage rates - both residential and commercial?
The last time I got a car loan 10 years ago the rate was 1.5% higher than my mortgage rate and now I get a rate that is over 1.5% lower than my mortgage rate

[Savoir Faire-Demogague in NJ]

3.14% is a decent rate, but I have to ask why are you financing a used auto for six years?

[ruleof72]

SF - I've heard that same concern from friends and relatives but I'm confident this was a smart move. Payment terms were not discussed until I had agreed upon the price of the vehicle. That's mistake #1 that most car buyers make. The low loan rate was just a bonus that enables me to keep my HELOC available and also invest more.

[jk70]

I got a 36 month (could have been 48 months if I wanted) 2.69% loan from bank of America in March for a used car

[Deleted]

I know these low rates are great for borrowers, but I'm kind of sick of not getting any interest on my savings.

[jk70]

I guess we can never have it both ways, though. If we were making 10% on our savings, mortgages and car loan rates would be 15%

[Deleted]

Since I never plan on borrowing again, I'll take the higher rates!

[RoadToRiches]

6 years car loan.. ughh...mine was 5 and I had enough of it, so I paid it off early.

[swamp]

Apr 21, 2011 12:28:01 GMT -5 RoadToRiches said:

6 years car loan.. ughh...mine was 5 and I had enough of it, so I paid it off early.

I also have a 6 year loan, but it's on a new vehicle and it's 0%. I figured I would take free money as long as it was being offered. I do have sufficient liquid assets to pay off the loan in full if I wanted to.

[ruleof72]

I'm still surprised that a bank would prefer to make an auto loan than a mortgage loan. This hasn't always been the case. Cars can be driven anywhere and *poof* they can disappear. Homes can't just walk away. Is it because a car's depreciation is now more predictable than a home's value?

Also - congrats indebt for paying off your loan early. It appears that your goals are clearly spelled out and that you are making good progress.

[phil5185]

I'm still surprised that a bank would prefer to make an auto loan than a mortgage loan.

They don't actually do that - the current cost-of-money on car notes is 5.09%. And banks & dealers don't have a secret money supply that they can lend out for 0%, 2.5%, 5%, etc. They pay the going market rate of 5.09% for the use of capital.

Clients are given choices because they like them - and it helps makes sales. You can choose $1000 discount and 5%, or $500 discount and 2.5%, or no discount and 0% interest. (made up numbers). And after you calculate the time-value of money, you will see that all 3 come up to the same answer - so the dealer doesn't care which one you pick.

Then the dealer discounts the loan and sells it to a bank - eg, he might sell a $10,000 0% loan to a bank for $9000. He gets his $9000 in cash from the bank and he already got $1000 from the client in mark-up.

[RoadToRiches]

Apr 21, 2011 12:31:41 GMT -5 swamp said:

Apr 21, 2011 12:28:01 GMT -5 RoadToRiches said:

6 years car loan.. ughh...mine was 5 and I had enough of it, so I paid it off early.

I also have a 6 year loan, but it's on a new vehicle and it's 0%. I figured I would take free money as long as it was being offered. I do have sufficient liquid assets to pay off the loan in full if I wanted to.

That's nice. I am going to do the same thing when I am ready to buy a car. I am pretty sure I won't buy brand new one, but if I can find a way to borrow at 0% and having money saved up somewhere just in case...that's what I am going to do.

[swamp]

I'm pretty sure you have to buy new to get the 0% financing. I looked at used and the best I could get was around 4%.

[ruleof72]

Phil - I don't know where you get the 5.09% from but 3.14% was not a special rate or teaser rate. It was not a condition of the purchase price.
I was approved from a credit union for 3.19% for 60 months but chose to go with the dealer financing because it was less of a hassle - no driving to the credit union, no opening a new account, etc...

So judging by interest rates - banks would prefer to offer car loans than mortgages

[973beachbum]

Apr 21, 2011 15:08:11 GMT -5 @ruleof72 said:

Phil - I don't know where you get the 5.09% from but 3.14% was not a special rate or teaser rate. It was not a condition of the purchase price.
I was approved from a credit union for 3.19% for 60 months but chose to go with the dealer financing because it was less of a hassle - no driving to the credit union, no opening a new account, etc...

So judging by interest rates - banks would prefer to offer car loans than mortgages

I used to work at a dealer and they can buy down the rate if they are trying to give buyers an incentive to purchase the car. It isn't much different from buying a house and you can pay points to lower the interest rate over the life of the loan.

Most of the time though it is GMAC doing it for GM cars and Ford Motor Credit etc, as an example, doing it for ford cars etc and not the dealer paying down the loan them self.

[formerexpat]

Yeah, rates are pretty good right now for cars. I got a 2.74% for a 60 month loan that has a residual value balloon payment in month 60. Discount that for the PV and that's a great deal. We just bought our car last week too.

Interest rate risk is why banks can offer the rate for a car. Much easier to assume a 3% loan for 5-6 years than a 3% loan for 30 years. You could, if you wanted, find a 5/1 ARM for about 3-3.3%.

5 year treasury yields are about 2.25% right now [7 year - 2.9%] while 30 year yields are 4.5%.

And that's why you're seeing car loans at 2.5-3% and 30 year mortgages at 4.75-5% after bank spread.

[Deleted]

Apr 21, 2011 13:28:14 GMT -5 phil5185 said:

They don't actually do that - the current cost-of-money on car notes is 5.09%. And banks & dealers don't have a secret money supply that they can lend out for 0%, 2.5%, 5%, etc. They pay the going market rate of 5.09% for the use of capital.

What goes into this "cost of money" calculation since there are plenty of banks offering 2.99% on recently used cars? I didn't realize they were in the business of charity.

[schildi]

Apr 21, 2011 8:10:26 GMT -5 @ruleof72 said:

How is it that auto loan rates are now so much lower than mortgage rates - both residential and commercial?

My mortgage is at 2.75%.

[azphx1972]

I read this the other day:

www.smallbizbigdreams.com/money-finances/pay-car-loan-early/

Is it true that a lot of car loans are based on pre-computed interest? I've only ever financed one car from the dealer in my life, and it was at 0% interest, so I'm curious.

[phil5185]

Is it true that a lot of car loans are based on pre-computed interest?

That was true in the 1950's and 60's.

As I recall, a $3000, 3 yr 6% loan cost 3000x.06x3 = $540 in interest. That would be almost like a 12% amortized loan. It was probably done for ease of calculation, it was before computers and before hand-held calculators - (kinda hard to do an amortization table with a sliderule & a log book).

[azphx1972]

Interesting. Thanks Phil.