Fed to rev up car loan rates slightly in 2016

The economists and market watchers might not be too edgy about car loan rates nudging up a smidgen in 2016. But a Rochester, Mich., couple said it's unnerving to think about paying even $10 a month extra if interest rates climb higher.

Stacey Priest, 36, and her husband John Taylor, 45, already owe $95,000 combined in student loans. They're taking advantage of income-based student loan repayment plans because they're not making a ton of money. She works in marketing at Costco. He works as a laborer at  D&N Bending, which supplies some equipment to Tesla.

They need a new car because they're expecting a baby this summer. And they visited the 2016 North American International Auto Show with the hopes of spotting something, like maybe a minivan, to buy later this year. She has a two-year lease that ends in October on a 2014 Chevy Cruze. He drives a 2002 Honda Civic.

"You have to budget everything," Taylor said. They'd like a car payment of $250 or less.

As much as experts say higher rates won't matter all that much to car sales, consumers still care about how much extra money will come out of their wallets after the Federal Reserve bumps up rates a few times in 2016.

If you're shopping for a car or truck, someone with good credit still should be able to find a car loan rate ranging somewhere from 4.5% to 5% in the months ahead. Higher rates will hit those with far less than stellar credit — where rates for subprime borrowers can be 10% to 15% or higher.

Car shoppers would be wise to follow some sage advice to make sure they get the best interest rates or deal on a lease:

• Know your credit score before you walk on the car lot. "Knowledge is power," said Karl Brauer, senior analyst for Kelley Blue Book. If you know you've got a strong credit score, you know you can qualify for a better rate, maybe even some 0% offers. But if you know your score is iffy, you're not going to kid yourself into thinking you can get 0%. 
• Pay your bills on time. Pay down some debt. Don't open new credit cards. Do what you can to improve your credit score to qualify for a lower loan rate. Review your credit report for possible mistakes. 
• Take time to shop around for some car loan rates in advance of going to the dealer. Some dealers will ask if they can match or beat that best rate, so you can decide where to borrow, as well. 
• "It's still a good market for getting a car loan," Brauer said. But some say rates could be lower earlier in the year, instead of later in the year once the Fed has had a few rounds of rate hikes. 
• Know the risks associated with taking out a 60-month or 70-month car loan. Some consumers could find themselves in a never-ending cycle of car loans, if they extend them out too long. The average term for new car loans taken out in the third quarter last year was 67 months, compared with 66 months for the same time in 2014, according to Experian Automotive. 

About 74.5 million consumers had an auto loan balance as of the third quarter of 2015. The subprime share was 18.7% of the total, or 13.9 million consumers, according to TransUnion.

Car loans are available for all levels of creditworthiness.

"It certainly is a very strong finance market for consumers," said Melinda Zabritski, senior director of automotive finance solutions for Experian.

Zabritski noted that a variety of factors are expected to keep new and used car sales going in 2016 — many cars and trucks on the road are older with the average age around 11.5 years, more people are getting paychecks so they need and can afford better cars, and car loan rates will still remain attractive.

Lower prices at the pump for gas could engineer more wiggle room into some family budget's too. Consumers saved an estimated $700 in 2015 with lower gas prices, according to a study by JPMorgan Chase & Co. Institute. So far, much of that savings is going toward restaurants and groceries already.

It's possible that some consumers would aim to buy a less-expensive car or take on a longer-term car loan to combat higher interest rates and higher payments.

Greg McBride, chief financial analyst for Bankrate.com, expects the average rate on a 5-year new car loan could move from 4.35% currently to around 5% by December. By contrast, the average used car rate for a 4-year loan would move from 5.15% now to around 6% by December, he said.

How rates translate into dollars

What does that mean for consumers?

On a $25,000 five-year new car loan, the payment could go up to about $472 a month at 5% compared with about $464 a month at 4.35%, he said.  Or we're looking at a jump of about $8 a month, said McBride, who expects the Fed to raise short-term rates two or three times in 2016.

The higher payment applies to someone taking out the loan at a later date at a higher rate. Car loan rates are fixed, so payments are locked in.

On the plus side, most consumers aren't likely to be turned down for car loans and many will still obtain some favorable rates.

"There is a lot of competition in auto lending now because of an improving economy," McBride said.

A few dollars here or there on a car payment shouldn't drive down auto sales in 2016, auto analysts said.

But thanks to the Fed's move to drive up interest rates, some consumers also will be hit by higher monthly payments for their credit card debt and other variable rate loans, including some mortgages, said Michelle Krebs, senior analyst for AutoTrader.com.

Krebs, who spoke at the CFA Society of Detroit meeting in January, said what could be concerning is the stacking up of all those relatively small monthly increases and the total impact on family budgets.

Will consumers be able to take on more debt as the cost of some of their existing debt goes up? It may be an important question for some millennial consumers who represented 28% of new car sales in 2015, according to Power Information Network from J.D. Power. That's up from 17% in 2010.

By contrast, Baby Boomers accounted for 37% of new car sales in 2015, compared with 43% in 2010.

College debts cause issues

Some younger consumers say they're nervous about getting socked with steeper monthly payments because of higher rates.

"We are young still. That college debt has got a hold of us," said Alicia Baldwin, 30, of Southfield, Mich. "My credit's not perfect; that's why we are worried."

Baldwin has student loan debt after attending Central Michigan University for three years but not obtaining a degree. Her boyfriend Chuck Bailey, 30, has a degree in sports management from Central Michigan and has student debt, too. The couple want to buy a new car later this year, maybe a Jeep, so they'd have a second car in their household. Right now, they're coordinating their schedules to make trips to work with her 2009 Chrysler Sebring.

She sells women's shoes at Nordstrom. He works at XPO Logistics.

Baldwin said she expects that her car loan could be in double-digit rates and any rate hikes from the Fed would really matter to her. They're willing to buy a car because both feel secure in their jobs.

Jason Laky, senior vice president and automotive business leader for TransUnion, said consumers have been able to afford more car because of improvements in the labor market and wage gains.

"New loans are generally larger than those they are replacing," Laky said.

When consumers go out and look to buy a car, many maintain that they can take on a longer car loan and buy a better-equipped car on the notion that they will keep the car for a long time. But another issue: How long will they be able to keep their jobs to make the payments?

"When the economy is strong, I think the industry as a whole should perform very well," Laky said. "It's a very competitive lending environment for lending right now, which is good for consumers."

Contact Susan Tompor: 313-222-8876 or stompor@freepress.com. Follow Susan on Twitter @Tompor.