Auto loan rate forecast for 2021

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Americans who plan to buy new or used cars in 2021 might not see auto credit rate drop as drastically as the year before, but the lowest interest rates will still be on their side.

The national average rate for a new 60-month car loan started the year at 4.24% and had fallen to 4.18% as of June 30, according to Bankrate data. Likewise, rates on a 36-month used vehicle loan started at 4.53 percent and declined to 4.49 percent.

The Federal Reserve, which has made it clear that it intends to stay the course throughout this year and most likely until 2022, said Greg McBride, CFA, chief financial analyst at Bankrate. A key form of short-term borrowing, auto loans are directly influenced by the Fed’s benchmark interest rate, the federal funds rate.

“The funding environment this year is very favorable with low interest rates, a recovering economy and strong competition among lenders,” said McBride.

Rates will continue to fall slowly

After the sharp declines in 2020 caused by the COVID-19 crisis, auto loan rates have continued to fall this year, albeit more slowly. This trend will likely continue until the end of 2021.

“Amid the economic recovery, the Federal Reserve will always keep interest rates low,” McBride said. “Credit rates for new cars are currently at their lowest since early 2015.”

Buyers see low inventory

The problem for car buyers this year, however, says McBride, is the lack of car inventory at dealerships across the country. The global chip shortage continued to severely affect the supply and availability of new cars. The North American stock at the end of May 2021 was around 1.5 million vehicles compared to 2.6 million at the end of May 2020, according to the National Association of Automobile Dealers (NADA), and it is expected to drop to 1.3 million by the end of July. The problem is further compounded by strong consumer demand.

“There is a shortage of new and used vehicles on dealership lots, which has hampered car sales,” McBride said.

New and used car prices on the rise

The challenges of new car inventories do not make prices cheaper for consumers. The estimated average transaction price for a new light vehicle in the United States reached $ 41,263 in May 2021, a sharp increase of 5.4% from the same period last year and 1.2% from to April 2021, according to Kelley Blue Book.

Buying a used car has always been a way to save money when buying a car, especially considering how quickly the value of a new car depreciates. The prices of used vehicles are generally much cheaper. However, the shortage of new vehicles also has an impact on used car prices. In the second quarter of 2021, the average transaction price for a used vehicle reached $ 25,410, compared to $ 20,942 in the second quarter of 2020, according to Edmunds.

The cost of a used vehicle started to climb in the first quarter of 2021, according to NADA, and prices are expected to remain high for the foreseeable future, while the challenges of producing new vehicles remain an issue. By the end of the year, used car prices could be up to 6% higher than the same time last year and will remain above pre-coronavirus levels, according to JD Power.

Get a lower interest rate by focusing on your credit score

The key to whether you will be able to get the best interest rates on a new or used car loan is your credit score.

Generally speaking, the highest interest rates are reserved for those who might seem riskier based on their credit profile. Based on data from Experiential for the first quarter of 2021, the average annual rates (APRs) on new and used car loans were 21.07% and 14.66% respectively for people with a credit score between 300 and 500. This compares to APRs for new and used car loans of 3.71% and 2.41%, respectively, for those with the highest scores between 781 and 850.

Improving your credit score is the best way to increase your chances of qualifying for a more competitive interest rate. Making timely payments and keeping your credit utilization rate low, diversifying your credit mix, and monitoring your report frequently should be on your radar. You may also be able to negotiate a better deal or loan term with your lender if you have good credit but feel your rate isn’t competitive.

Next steps

Manufacturing bottlenecks and chip shortages caused by coronavirus-related shutdowns continue to impact prices for new and used cars. Those who are willing to be patient and expect any challenges may be able to get better deals on car purchases.

If you are planning to buy a car now, Edmunds recommends being prepared to do more research and be more flexible than usual with your budget to get the vehicle you want. The auto industry company says 12.7% of buyers paid above the sticker price for a new vehicle in April 2021, up from 11% the month before and 8.1% in April 2020. You also need to be prepared to act faster when you find the car you want and plan to expand your search radius in a tight market.

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