Auto Loan Interest Rates Are Dropping : Financing: But experts say its unclear whether the action will set off heavy consumer demand.

Interest rates on car loans are dropping, in some cases to levels not seen since the 1970s, but whether cheaper credit will stimulate weak car sales remains to be seen.

“The good news for auto shoppers is cracks are starting appear in auto rates for the first time in years,” said Robert Heady, publisher of the Florida-based Bank Rate Monitor, which follows trends in interest rates.

Nationwide, the average rate last week for a four-year automobile loan charged by commercial banks to walk-in applicants was 10.49%. That’s substantially cheaper than the 12.29% rate a year ago, Bank Rate Monitor said. Banks generally give a better rate to their own customers.

But it’s unclear whether the lower rates will set off heavy consumer demand, such as that seen in the refinancing of home mortgages, which are also at the lowest levels since the 1970s.

The nation’s auto makers have reported that sales of domestically made vehicles fell 6.2% in early January from the already depressed levels a year earlier. There was no evidence in those numbers that cheaper auto loans were luring customers.

Harris Trust & Savings Bank in Chicago has cut its auto loan rate by more than 2 percentage points, to 11.5%, since September, but demand has been slack, said spokeswoman Mary F. Ullrich.

One explanation is that other lenders, notably the auto makers themselves, offer lower rates than the banks. Another explanation is that interest on auto loans, unlike mortgages, isn’t tax deductible.

Ullrich said many consumers who own homes have chosen to finance a new car through a home equity loan, which carries a much lower interest rate than an auto loan. Moreover, the interest on home equity loans is deductible, she said. Robert Dugger, chief economist for the American Bankers Assn., a trade group in Washington, said he was confident that cheaper loan rates eventually would help auto sales rise.

“Will it work this month? Maybe not,” he said. “Will it work within six months? Yes.”

As rates decline, he said, more consumers find they can afford the monthly payments on new car loans.

Dugger said the lower rates are partly a response to competition from the auto makers’ own financing subsidiaries, which in some cases offer zero percent financing or extremely low financing. But those terms only apply to certain models.

Auto finance companies hold about 26% of all auto loans in the country, said Tom Webb, chief economist for the Virginia-based National Automobile Dealers Assn. Banks have about 44% of all outstanding auto loans; credit unions and finance companies hold the rest, he said.

General Motors Acceptance Corp. in Detroit, which finances loans for cars sold through its dealers, is offering 2.9% financing for purchases of the Pontiac Bonneville, Oldsmobile Delta 88 and Buick Le Sabre.

Carol Knorr, a vice president at GMAC, said the financing incentives have boosted sales of those cars.

Knorr agreed that rates have been coming down but declined to predict if and when that would translate into greater sales overall.

Some banks are very aggressive in their auto loan pricing. Since early September, NationsBank in Virginia has cut its auto loan rate by 3.55 percentage points, to 8.2%.