How a Recession Can Affect New Car Loan Interest Rates

New car loan interest rates are not based on your personal financial profile alone. While your application is important, there are some factors that are outside of your control when your loan comes across the table. In a recession, factors work both ways to make loans harder to get and easier to get all at once. This can be confusing, but remember that the role of your credit score and the national interest rates is always significant, whether the nation is in recession or booming.

The National Interest Rate

The national interest rate is what banks charge one another to borrow money. While the interest rate is a complicated number to determine, the Federal Reserve sets the levels in order to control inflation and encourage healthy financial activities. In a recession, the interest rate tends to drop. This is in an effort to encourage spending and borrowing to force the economy back into motion. When national interest rates are low, the interest rates banks charge may additionally go down. However, this is not always true across the board. If the recession is causing bank failure and loan default, interest rates on loans may go up even if the national interest rate is down. This is particularly true for bad credit borrowers. Good credit borrowers can usually take advantage of low national interest rates.

Liquidity in the Credit Market

Liquidity is a term used to describe how much actual cash is out there for the taking. During a recession, liquidity is very low. This means fewer banks have access to monies to lend. There is more competition for the limited loans the banks and lenders are providing. This means your application will need to stand out much more in order to get any loan. Car loans often come through dealer finance groups, like General Motors Acceptance Corporation. These lenders also have less liquidity in a down economy. You will need to be better than other applicants to secure a coveted loan.

Financial Stimulus

Once factor pushing car loans in the opposite direction during a recession is financial stimulus from the government. In most recessions, the government will put in place certain incentives to encourage lenders to continue lending. In 2009, one such stimulus was the "Cash for Klunkers" program. The government offered to provide up to $4,500 for a car meeting certain standards in bad fuel economy if you traded it in for a more energy efficient vehicle. This is just one example of a financial stimulus. Other programs include government guarantees on certain loans that meet specific criteria. 

Dealer Incentive

The dealers themselves may start offering incentives for you to purchase in a recession. Often, people stop making large purchases during a recession, and automobiles are one of the first things to get cut. In response, dealers need to make financing more affordable for those willing to take the risk and buy a new car. Car loan interest rates from the dealer may drop. These incentives can allow you to get a great loan offer you may not otherwise find. 


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