As car buyers head back into dealerships after a two-year drought, they're being greeted by rock-bottom interest rates on auto loans, eye-popping lease deals and a renewed willingness to lend to people with spotty credit.
Banks are on firmer financial footing, helped by government aid and renewed demand for auto loans that are packaged and sold as securities, a market that raises money and allows banks to write more loans. Buyers, too, are gaining confidence. U.S. auto sales rose 20 percent in February to the highest monthly pace since Cash for Clunkers in August 2009.
This month, General Motors, Chrysler, Ford, Nissan and others are offering zero-percent interest rates on auto loans. Luxury makers such as Acura and Cadillac have lease deals with zero-percent down. Banks have cut their interest rates on auto loans in half.
"If you feel comfortable purchasing today, the deals are out there to be had," says Mark Hawks, 40, an information technology specialist from suburban Washington D.C., who shaved thousands of dollars off the sticker price of the Ford Taurus SHO sport sedan he bought in December.
Hawks has a credit score of 780, which puts him in the highest tier of borrowers. He was pre-approved through his credit union for a five-year loan with a 3.99-percent annual interest rate. But his dealer beat that, offering a 3.79-percent rate with no payment for 90 days through Fifth Third Bank. The dealer also kicked in a $2,000 rebate and the trade-in value of Hawks' eight-year-old Subaru. Final price of the new car: $33,000, compared with a sticker price of $46,000.
The lesson? Shop around for favorable loan terms, even if you don't have great credit.
Here are some reasons for the great deals:
* Lower rates. Buyers are paying an average annual percentage rate of 3 percent for new cars financed in February, down from nearly 4 percent in the same month a year ago, says auto research site Edmunds.com. That's one of the lowest rates since before the economic downturn, when cheap credit helped fuel the housing bubble and subsequent financial meltdown.
Banks, credit unions and automotive financing companies are in fierce competition to loan you money. While credit unions and finance companies once offered the lowest rates, banks now have more competitive financing.
With short-term rates near zero percent, banks that offered loans at 7 or 8 percent can now profit off 3 or 4 percent, says Greg McBride, a financial analyst with the personal finance website Bankrate.com.
* More loans for subprime borrowers. Unlike much of 2010, when the auto loan market was open mainly to buyers with the best credit, people with weak credit histories now are having an easier time finding loans because of the competitive market.
The percentage of new-car auto loans going to subprime buyers -- generally those with credit scores below 680 -- rose 18 percent in the last three months of 2010 compared with the same period the year before, according to Experian Automotive.
* Better leasing deals. Leasing is making a comeback. That's a boon for people seeking lower monthly payments on a car or truck. Leases made up a quarter of new-car transactions in February, Edmunds says. That was the highest single month for leasing since November 2005.
Generally, leasing means you pay less per month than you would on a car loan. The reason: you're only paying off the amount the car will depreciate before you turn it in. When you buy, you're paying for the whole car, plus finance charges.
Typically, about 20 percent of new cars are leased. But the bottom fell out of that market at the beginning of the downturn because there were too many used cars and not enough demand for cars coming off lease. Leasing fell to 16 percent of the market in 2009. But as the recession progressed, used cars became scarce as people looked for cheaper wheels. That caused used-car prices to rise. Now, lenders are more willing to take on a lease, knowing the car will be worth something when the lease is up.
Cadillac, for example, is now offering to lease a $37,290 CTS luxury sport sedan for $399 a month for 36 months with no money down, according to Edmunds. A year ago, you had to put down nearly $6,300 for a similar deal, with a monthly payment of $369.
Interest rates are likely to stay low this year, as the economy continues to recover. That will help keep loan terms attractive. Competition also remains fierce among car companies. GM said earlier this month that it expects to dial back on lease deals and other incentives as the year goes on, but it could keep them in place if it faces too much pressure from rivals.
But even though deals are good, lenders have learned their lessons from the bust. Hawks, with his stellar credit, couldn't match the deal he got on his Subaru in 2002. Back then, he paid 2.9-percent annual interest rate on a five-year loan.