Friday, December 26, 2008

How to Find the Best Loan Rates - part 2

The Skinny on Auto Loan Rates

What Impact Rates
Interest rates on auto loans can be pegged to either the prime rate or yields on Treasury securities. Rates are currently at their lowest in many years, although traditionally there is not a lot of movement.

"The average new car loan rate over the last seven or eight years has fluctuated between 7 percent and 9 percent, despite a Fed funds rate that has ranged from a low of 1 percent to a high of 6.5 percent," says Greg McBride, Bankrate's senior financial analyst.

Lenders use risk-based pricing. So, as is the case with other lending products, customers with the highest credit scores will qualify for the lowest interest rates.

Bankrate's data on auto loan rates go back 10 years. Rates peaked in October 2000, and reached lows in recent months.

For example, the 36-month new car rate ranged from a high of 9.71 percent in October 2000 to a low of 6.89 percent in May 2008. Rates for 48-month and 60-month new car rates followed the same pattern, only slightly higher.

Used car rates run higher still. The 36-month used car rate ranged from a high of 10.82 percent in October 2000 to a low of 7.73 percent in July 2008.

Bankrate's Interest Rate Roundup gives you the latest information on auto loan rates.

Get a copy of your credit report and correct any inaccurate information. Check car-buying guides and Web sites and get a price range for the vehicle you're interested in before you step foot on the dealer's lot. Compare finance offers from various lenders, not just the manufacturer's finance arm at the dealership.

Despite the credit crunch, slumping auto sales have prompted some auto manufacturers to offer low-interest or zero-percent-interest financing on select models to qualified customers.

You'll need excellent credit to qualify for these deals and may need to pay the loan off in as little as 36 months.

If you have bad credit, you're going to run into two possible scenarios. "Some lenders just won't give you credit at all, and those that do are going to charge you a higher interest rate," McBride says.

For those with less-than-stellar credit, there is another option to consider -- credit unions. For the most part, these financial institutions use the same risk-based analysis that other lenders use, i.e., FICO scores, but with a twist.

"We don't make loan decisions based solely on FICO scores," says Phil Greer, senior vice president of loan administration at the Raleigh, N.C.-based State Employees Credit Union.

Greer says the credit union's loan officers analyze members' credit reports to find out if derogatory information reflects just a bump in the road.

"If we can determine that the issues that caused the problem with your credit report were due to things like illness or divorce, and that's no longer hanging over your head, then we probably think you're in that percentile that is probably going to pay us rather than default on the loan," he says.

Highs and Lows

Bankrate's data on auto loan rates go back 10 years. Rates peaked in October 2000, and reached lows in recent months.

For example, the 36-month new car rate ranged from a high of 9.71 percent in October 2000 to a low of 6.89 percent in May 2008. Rates for 48-month and 60-month new car rates followed the same pattern, only slightly higher.

Used car rates run higher still. The 36-month used car rate ranged from a high of 10.82 percent in October 2000 to a low of 7.73 percent in July 2008.

Bankrate's Interest Rate Roundup gives you the latest information on auto loan rates.

How to Get the Best Rate
Get a copy of your credit report and correct any inaccurate information. Check car-buying guides and Web sites and get a price range for the vehicle you're interested in before you step foot on the dealer's lot. Compare finance offers from various lenders, not just the manufacturer's finance arm at the dealership.

Despite the credit crunch, slumping auto sales have prompted some auto manufacturers to offer low-interest or zero-percent-interest financing on select models to qualified customers.

You'll need excellent credit to qualify for these deals and may need to pay the loan off in as little as 36 months.

If you have bad credit, you're going to run into two possible scenarios. "Some lenders just won't give you credit at all, and those that do are going to charge you a higher interest rate," McBride says.

For those with less-than-stellar credit, there is another option to consider -- credit unions. For the most part, these financial institutions use the same risk-based analysis that other lenders use, i.e., FICO scores, but with a twist.

"We don't make loan decisions based solely on FICO scores," says Phil Greer, senior vice president of loan administration at the Raleigh, N.C.-based State Employees Credit Union.

Greer says the credit union's loan officers analyze members' credit reports to find out if derogatory information reflects just a bump in the road.

"If we can determine that the issues that caused the problem with your credit report were due to things like illness or divorce, and that's no longer hanging over your head, then we probably think you're in that percentile that is probably going to pay us rather than default on the loan," he says.

The Skinny on Student Loans

What Impact Rates
The federal government sets the interest rates on federal student loans such as the Stafford and PLUS loans.

The College Cost Reduction and Access Act, signed into law in September 2007, changed the interest rates on subsidized Stafford Loans from 6.8 percent to 6 percent, starting with loans disbursed on or after July 1, 2008. Next year the rate goes down to 5.6 percent.

Unsubsidized Stafford loans remain unchanged at 6.8 percent.

The interest rate for federal Perkins Loans for both undergrads and graduates is 5 percent.

Private student loan interest rates are variable and based on either the LIBOR index or the prime rate.

"In our case, they are based on LIBOR and can change each month based on the way the LIBOR moves," says Patricia Nash Christel, director of communications at Sallie Mae in Reston, Va.

Highs and Lows
The interest rates on Stafford loans disbursed between July 1, 1998, and June 30, 2006, are variable and based on the 91-day Treasury bill rate plus between 1.7 percent and 2.3 percent, depending on whether the student is still in school or in repayment status.

Going forward, interest rates on undergraduate subsidized Stafford loans will be fixed based on a sliding scale, depending on the year in which they are disbursed.

Beginning July 1, 2008, the interest rate is 6 percent. In July 2009, the interest rate will be 5.6 percent; in 2010, 4.5 percent; in 2011, 3.4 percent; in 2012, 6.8 percent.

The interest rate on undergraduate subsidized Stafford loans disbursed between July 1, 2006, and June 30, 2008, is fixed at 6.8 percent.

For graduate students, the interest rate for both subsidized and unsubsidized Stafford loans is 6.8 percent.

The interest rate on Stafford loans disbursed between July 1, 1998, and June 30, 2006, is variable but can't exceed 8.25 percent.

PLUS loans disbursed after July 1, 2006, are fixed at 8.5 percent. PLUS loans disbursed between July 1, 1998, and June 30, 2006, are variable, but capped at 9 percent.

These figures come from Sallie Mae.

How to Get the Best Rate
Federally backed, subsidized student loans are available at attractive fixed interest rates to any qualified college student based on need and regardless of credit score.

Prospective students should fill out a Free Application for Federal Student Aid, or FAFSA. The filing season begins in January, and it's in your best interests to file as early as possible. Early filers often qualify for the maximum amount of grants and low interest loans, according to Christel.

If you need a private loan and your credit is iffy, get a copy of your credit report before applying for a loan to make sure there are no surprises. Then get several quotes as quickly as possible.

"To the extent that you are shopping around for private loans, we advise that you shop within a short period of time," says Martha Holler, a SallieMae spokeswoman.

It's best to shop loans within a 10-day period so that the credit bureaus don't assume you are looking for multiple loans and adversely lower your credit score because there are too many inquiries, she says.

The credit crunch has caused many lenders in the private market to stop offering loans. If you're seeking help from parents, see if Mom and Dad might be willing to apply for a PLUS loan, which offers fixed rates.

The Skinny on Personal Loans

What Impact Rates
Interest rates for personal loans are comparable to interest rates for credit cards, which are loosely pegged to the prime rate.
"In many cases they're sort of substitutes for each other," says Greg McBride, senior financial analyst at Bankrate "That's another product that really doesn't move around a whole lot. It's a higher risk product and it's not as sensitive to interest rate changes."

Financial institutions will also base personal loan rates on other factors unrelated to such indexes as the prime rate.

"By and large, we set the rates to be competitive in the marketplace," says Phil Greer, senior vice president of loan administration at the Raleigh, N.C.-based State Employees Credit Union. He adds that the credit union also takes into account a number of other factors, including its own financial picture.

Highs and Lows
Personal loan interest rates, for which Bankrate has data for 10 years, is based on an assumption of a $3,000 loan repaid over 24 months.

Interest rates ranged from a low of 13.72 percent in July 2008 to a high of 15.43 percent back in January 1998.

How to Get the Best Rate
Shop several lenders. Sooner is better than later because personal loan rates are lower than they've been in several years.

Credit unions are a viable alternative to traditional lenders. They generally offer favorable rates on loans and credit cards to their members. (Customers are actually dividend-eligible shareholders and are referred to as members rather than account holders.)

Credit unions charge an average of 10.64 percent nationally for a 36-month fixed-rate personal loan, significantly lower than the national average for other types of financial institutions, according to data reported in June by the National Credit Union Administration.

They tend to look at a member's overall financial situation and relationship with the credit union rather than the FICO score alone.

You may also be able to secure a lower interest rate for a personal loan from a traditional lender by using collateral, such as home equity or a free-and-clear car title, according to Bankrate's Greg McBride.

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