As a consumer, you are bombarded daily with advertisements on television, radio, the internet and in newspapers for low rate auto loans. These auto loans fall into 2 categories: standard auto loans and subvented auto loans.
Standard auto loans are those loans offered by banks and other independent lenders and are usually based on the prime rate plus a mark-up. Under most circumstances, these standard auto loans have a fixed interest rate that is adjusted for the loan term. The base loan term is usually 24 months. As the loan term increases, the interest rate usually rises with the highest interest rate corresponding to the longest loan term - anywhere from 60 to 84 months, depending on the lender. The reasoning behind the rate to term difference is that lenders need to take into account the possibility of future interest rate increases.
Subvented low rate auto loans are an entirely different breed. Unlike standard auto loans, these interest rates are set artificially low in order to entice car buyers into dealer showrooms. The lender is not an independent bank or lending institution, but one of the captive finance companies of the auto manufacturers. The car manufacturer supports these lower interest rates with a subsidy that is paid to the captive finance company. This money enables the finance company to charge the customer a rate that is below normal market rates.
But beware, there is a catch. In order to qualify for this special rate, you have to buy a specific vehicle or among a group of vehicles for a set loan term that is often limited to 24 or 36 months. If you require a longer term, you either have to forego the special rate or, in come instances, settle for a higher subvented rate.
One more note: In order to qualify for either a standard low rate auto loan or a subvented low rate auto loan, you need to meet certain minimum credit criteria. Not all buyers will qualify and those with bad credit (a FICO score of less than 640) will, in most cases, not qualify for these types of loans.
Tags: auto loan