Did you make a resolution to save money this year, but now find yourself in desperate need of a new vehicle? The timing of a car purchase can be critical to keeping more of your hard-earned money. Planning ahead makes a big impact on the price you pay for the vehicle itself, as well as the financing costs. In 2020, auto interest rates stayed low, and automakers offered enticing deals to spur car sales during the pandemic. If the uncertainty of 2020 stopped you from pulling the trigger on a new car, holding off may have been a wise decision as rates are expected to drop further this year. Here's why 2021 will be a great year for a new car purchase or lease, and how you can maximize your savings.
APR Rates Predicted to Be The Lowest in 6 Years
The average price of a new vehicle has passed a staggering $40,000, but that doesn't mean a good car or SUV is out of reach for the average car shopper. A new vehicle can come with both a reasonable price tag and financing rates. Although the average price seems very high, it is mostly driven up by large trucks and SUVs. Luckily, there are still many affordable options to suit just about every need and budget.
When it comes to financing, shoppers can look forward to lower interest rates this year. According to Forbes, 5-year auto loan rates are expected to drop to 4.08% in the coming months, while 4-year rates are expected to average 4.75%. In comparison, in January of 2020, 5-year rates stood at 4.6%, while 4-year rates averaged 5.33%. By the end of last year, rates dropped to 4.22% and 4.88% respectively. If we look at the price of an average vehicle, this drop means a savings of $627 on a 5-year loan with a $5,000 downpayment and $779 with a 4-year term.
If these predictions pan out, Forbes reports that the rates for 5-year auto loans will be the lowest they've been since 2015, while 4-year rates will be the lowest since 2014. It's important to note, however, these rates will be available for shoppers with good or excellent credit. Those with compromised credit should be aware that interest rates available to them will be higher. According to WalletHub, buyers who have fair credit will spend nearly five times more to finance a vehicle than those with excellent credit. This adds up to $5,977 in additional interest payments over the life of a $20,000, 5-year loan.
Lease Rates Also Expected to Drop
For shoppers looking to lease a vehicle in lieu of buying, there's a positive outlook on the horizon as well. In addition to lower financing costs, lease residual values are expected to stay strong. A vehicle's residual value is an estimate of the dollar amount the car will be worth at the end of the lease term, and it determines the monthly payment. The higher the expected residual value, the lower your monthly payment will be.
As the auto industry rebounds from the COVID-19 pandemic, automakers will likely offer very low finance and lease rates on specific models in order to spur sales. Wallethub reports that the average Lease APR (Inferred interest rate) available from manufacturers to-date in 2021 is 4.64%, a drop from 5.85% in Q1 of 2020.
How to Find the Best Auto Loan Rates
What is considered a good auto loan interest rate? According to Motor1, any rate below 4% is excellent. Car shoppers with a credit score over 670 are typically considered low-risk in the eyes of lenders and should be able to find favorable interest rates in 2021. Unfortunately, shoppers with bad credit may encounter much higher interest rates since a credit score is the most important factor that determines the rate lenders are willing to offer.
Car shoppers, especially those with compromised credit, should take a proactive approach to ensure they get the best possible interest rate. First, it's important to thoroughly understand your credit score and work to improve it by fixing any errors, getting rid of credit card balances, and paying bills on time. Next, shop around for auto loan offers through various lenders like banks, credit unions, or subprime auto lenders. Getting pre-approved for auto financing allows you to compare offers and select the best rate and loan term. This approach can add up to hundreds, if not thousands, of dollars in savings over the course of the auto loan.