New Financing Options for Car Buyers

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The information in this article is from 2006.

New car shoppers will enjoy many of the trends shaping up in the automotive industry in 2006. They're likely to find a broader range of vehicle safety features, wider availability of hybrid engines and unprecedented flexibility in seating and storage systems. But a less-publicized trend -- rising interest rates on vehicle loans -- may prompt many consumers to focus their attention on shopping around for the best financing rate, as well as the hottest vehicle features.

"Shopping for auto loans may not be as exciting as the latest vehicle options available today, but I think most consumers agree that saving money never goes out of style," says Brian Reed, vice president of Capital One Auto Finance. "For smart consumers, the current rising interest rate environment will serve as a reminder that it's important to shop around to get the best rate on their loan before buying."

Here's a look at some of the key factors that could compel more car buyers to add financing to their automotive shopping lists in 2006.

Vehicle Loan Interest Rates Are Accelerating. According to, the national bank average on vehicle loan interest rates rose steadily in 2004. Bankrate reported that the average interest rate on a 60-month new car loan rose from 5.07 percent in April 2004 to 6.25 percent by December. And the Federal Reserve has left the door open to more rate increases in the coming months of 2006.

Shopping for Loans Can Save Money. In today's rising interest rate environment, it's vital for consumers to comparison shop for the lowest rate. For example, a consumer who gets a five-year, $20,000 loan at 7 percent APR will pay about $1,115 more over the life of the loan (about $18 more a month) than if they shopped around and secured the same loan on their own at 5 percent APR, according to Capital One Auto Finance.

Car Buyers Are Not Always Diligent. A 2004 survey shows one-third of car buyers admit they gloss over a portion or all of their car purchase paperwork, including financing terms. Another recent study reveals over half of those making monthly car payments say their loans are burdensome enough to keep them from making a major purchase.

Zero Percent Auto Loans Are Rare Today. Consumer shouldn't assume they'll receive a zero percent loan on their new car. Approximately 7 percent of all new car sales in 2004 were made with interest-free loans according to the Power Information Network. And national reports suggest that auto makers may be less likely to offer zero percent deals in 2006 as rates rise.

Many Consumers Don't Consider All Financing Options. According to CNW Research, most new car buyers (61 percent) still take the traditional path of arranging their loans at the dealer at the time of purchase. Many consumers don't fully explore all of the financing alternatives available to them before they buy. For example, car buyers who prefer to comparison shop for interest rates and secure a loan on their own before buying will find an array of options. These include online auto lenders, credit unions and banks.

The Internet Offers Valuable Auto Finance Resources. Consumers may be surprised to learn they can now use the Web to 1) check their credit score and ensure mistakes are corrected before applying for a loan (nearly 80 percent have errors); 2) investigate interest rates available in the marketplace, so they know a good rate when they see one; and 3) apply for a no-obligation loan from an online lender, bank or credit union before they buy.

Having Your Own Loan Simplifies the Transaction. Consumers who walk into a dealership with a loan in their pocket already know their interest rate and spending limit. This simplifies the buying process, enabling the buyer to focus on the purchase price and trade-in value as separate transactions. Make sure your loan carries no obligation, so you don't incur a penalty if you decide not to use it.

Online Lenders Provide a Range of Advantages. For example, at consumers will find a convenient application process and will receive a reply to their online applications within 15 minutes during business hours. Those approved receive a no-obligation Blank Check as soon as the next day, which they use like a personal check at the dealership. And online interest rates are typically among the lowest consumers will find in the marketplace.

"If car buyers would spend just a fraction of the time researching their auto loan as they do the latest features on their new car, they'd be surprised at how much money they could save," says Reed of Capital One.