4 Factors that Contribute to Fluctuating Interest Rates on Car Loans

Fluctuating interest rates on your car loan are due to both national and personal financial factors. You cannot seek a loan without paying attention to the national trends in lending and credit markets. These factors will weigh as heavily on the cost of financing as your personal credit history. However, all loans will additionally depend on your personal status as a borrower. Ultimately, it is the combination of these factors that determines your interest rate quotes. 

National Prime Interest Rate

The national prime interest rate, set by the Federal Reserve, determines how much banks and lenders pay for their own loans. These lenders then place a slight markup on the interest rate in order to profit off of loans to consumers. When the national prime interest rate is low, consumers can expect to see their personal rates drop. While there are many other factors aside from this basic rate, it does set a baseline standard for lenders. The prime interest rate is typically lower in a recession and higher in an economic boom. A low interest rate is meant to encourage lending and curb inflation.

Strength of Credit Markets

The strength of the credit markets is a measure of how much lenders are lending. It is also dependent on the national rate of defaults and foreclosures. When lenders are hesitant to lend, and borrowers are defaulting, the credit market will be very weak. A weak credit market simply means there is not a lot of cash floating around for borrowers to grab up to purchase things like cars. When the credit market is weak, the interest rate on your car loan will go up. Usually, the national prime rate and the weak credit market are opposing forces, driving the interest rate in opposite directions. 

National Auto Sales

A number of auto loans will come straight through the manufacturer. When manufacturers are not selling many cars, they may introduce incentives to get people to purchase vehicles from them. One common incentive is a lower interest rate. As auto dealers struggle, particularly in a recession, borrowers may find it is a great time to snag a car at a low sticker price and at a low interest rate. Financing is even more affordable for those borrowers who qualify for incentive programs guaranteed by the federal government. These incentives are often put in place to boost auto sales during a slow economy.

Your Credit Score

The national factors listed are only a portion of the picture. You will still need to qualify based on your personal credit to get a good quote on your auto loan rates. Good credit is usually defined as any number over 700. However, credit as low as 600 may be considered for an auto loan at a decent rate. The best way to build your score is to assure you have no missed payments in the two years before your auto loan. Reducing the amount of financing you are using to less than 10% of your limits on credit card and credit lines will also boost your credit. 

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