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New-car financing rates expected to drop in 2021

January 8, 2021
Despite rising prices for new cars, SUVs, and especially pickup trucks, experts predict low interest rates should continue to work in the favor of buyers and lessees throughout the year. That’s welcome news not only for those who intend to buy or lease a vehicle, but it should help automakers and dealers move the metal in the wake of falling sales caused by the latest surge in coronavirus cases.
According to BankRate.com’s chief financial analyst Greg McBride, CFA, the national average for a five-year new-vehicle loan should drop to 4.08% in the coming months, with four-year financing expected to average 4.75%. By contrast, auto loan rates were at 4.60% last January for five-year terms, and 5.33% for five-year financing. They subsequently dropped to 4.22% and 4.88%, respectively, by year’s end.
With the typical new vehicle now costing about $39,000, the expected rate cuts would mean a consumer could expect a monthly payment of $627 on a five-year loan with $5,000 down and $779 on a four-year term.
"The backdrop of low interest rates and a recovering economy will bring about an easing of terms, especially rates, as competition heats up," McBride said. "We’ll see rates for both new- and used-car loans trending lower throughout the year, but at a snail’s pace."
Lower financing costs and still strong residual values will likely help new-vehicle leasing stay affordable as well. That’s because monthly payments are based on the difference between the transaction price and what it’s expected to be worth at the end of the term, financed at current rates. It also would make it easier for automakers’ financing subsidiaries to offer low-rate or zero-percent-interest loans on select models as needed to spur sales.
If Bankrate’s predictions are, in fact, on the money, that would mean five-year auto financing would be the cheapest since early 2015, with four-year rates being the lowest since 2014. That’s when the Federal Reserve Board first began raising interest rates since the onset of the Great Recession.
As it is, the Fed has already signaled to keep borrowing rates at 0% through 2023 at the earliest to keep the U.S. economy in positive territory in wake of the COVID-19 pandemic’s punishing effects. 
 
 

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