Credit Crunch: The Cost of Auto Loans
Posted by Mike Mandel on February 13, 2009
How did the credit crunch affect the market for auto loans? When buying a new car or a truck, most people have to borrow at least part of the money. They get an auto loan from either a bank, or the company selling them the vehicle (generally through a car financing company). The exact interest rate on the loan depends on their credit score, a number which reflects several factors, including whether they have paid back previous loans on time.
In the past, the interest rate on auto loans has usually fallen when the Federal Reserve has lowered the fed funds rate. That was because a lower fed funds rate generally means that the Fed had put more money into the financial system, increasing the amount of funds that banks and car financing companies have available to lend.
But the credit crunch broke that link between the fed funds rate and the rates on auto loans. Starting in late 2007, the Fed has cut and cut the fed funds rate, down to close to zero.
However, auto loans did not follow. As the chart below shows, the interest rates on auto loans are barely cheaper than they were two years ago. Even when car companies offer “zero-rate” auto loans, they are only available to the customers with the very highest credit scores.
