When you purchase a vehicle, you want to find a great car at a reasonable price, but you also want to secure a low auto loan interest rate.
Your interest rate can significantly impact how much you pay over the life of your loan. That's why it's essential to know exactly what an auto loan interest rate is, how it's determined, and how it affects your car loan amount.
What Is A Car Loan Interest Rate?
Your interest rate is how much you pay annually to borrow money from your lender. Your annual percentage rate (APR) is how much you pay annually, including interest and fees. You will usually see auto loan interest rates referred to as the APR, which includes all fees. The higher your APR, the more money you'll pay to the lender. Below are some important facts to know about auto loan interest rates.
Average Interest Rate
Your rate can vary based on a variety of factors, including your credit score, the term of the loan, the age of the vehicle, and more. The national average for a used auto loan interest rate is 5.23% for a 750+ credit score. However, you can find an APR ranging from 0% to 25% or higher.
Car Loans Vary
Car loan interest rates can vary from day to day, so it's a good practice to check interest rates before you go shopping. When comparing APR, be sure you're comparing APR to APR instead of APR to interest. Remember, APR includes fees, while interest alone doesn't.
Car loans are amortized, meaning the interest is front-loaded at the beginning of the loan. With amortization, part of the monthly payment goes toward the principal, and the remainder is applied to the interest owed. At the beginning of your loan, more of your payment will be applied to your interest, while as time goes on, more of the payment will go toward the principal.
Simple Interest vs. Precomputed Interest
Your auto loan interest rate can be computed in two ways - simple interest and precomputed interest.
Simple interest means the interest is based on how much you owe when your car loan payment is due. Any amount you pay over the amount due will go towards the principal balance.
5 Factors Impacting Auto Loan Interest Rates
Various factors impact your car loan interest rate. Here are five of them.
1. Type of Car
You'll find that in general, the interest rate on a used car is higher than that of a new car. Used vehicles tend to come with higher rates because the lender is taking more of a risk by lending money for a vehicle that is likely to be less reliable. Some lenders even have limits on the age of a vehicle they will finance.
Used cars can also have a lower resale value. The lender considers this because if you default on the loan, they might need to sell your car, and they want to recoup as much as they can.
2. Auto Loan By Lender
The lender you select can also significantly affect the interest rate you get.
Generally, you will qualify for a lower interest rate at a credit union. Credit unions also offer more flexible payment schedules and have lower loan minimums, so you can finance a less expensive vehicle.
Banks are typically more particular regarding who they approve for auto loans and the type of vehicle they will finance.
Dealerships are another popular option for auto loan financing. They often offer special financing options for new vehicles if you have excellent credit.
3. Credit Score
Your credit history and credit score will also greatly impact the car loan interest rate you receive.
The higher your credit score, the lower the interest rate you'll get because your history gives the lender confidence that you'll fulfill your end of the agreement. The opposite is also true.
4. Term Length
Lenders consider the length of the loan when determining your auto loan interest rate.
Term lengths tend to range from 24 to 72 months, and the shorter your term, the lower your interest rate will be on average. This is because the longer you have a car loan, the more likelihood there is that you will default on your loan due to a change in financial circumstances. When the lender charges more for interest, they get more of their money back upfront.
How Does Your Interest Rate Affect Your Car Loan?
One of the best ways to demonstrate how your interest rate impacts your car loan is with an example showing how much you pay on a loan based solely on the interest rate changing.
In this example, you purchase a $35,000 vehicle on a six-year term with a $3,500 down payment.
Interest Rate: 4.69%
Monthly Payment: $502.79
Total Amount Financed: $36,200.70
Total Interest: $4,700.70
Interest Rate: 10.91%
Monthly Payment: $598.12
Total Amount Financed: $43,064.89
Total Interest: $11,564.89
Interest Rate: 19.62%
Monthly Payment: $747.59
Total Amount Financed: $53,826.74
Total Interest: $22,326.74
As you can see, the interest rate you get can make the difference between paying $4,700.70 in interest payments and $22,326.74 in interest payments. That's the impact it can have, and why knowing your interest rate, what determines it, and how it can influence your auto loan is vital.
Be Knowledgeable About Car Loan Interest Rates
Now that you know more about auto loan interest rates, we hope this information makes it easier as you move forward in purchasing your next vehicle. The more knowledgeable you are, the better, so you can secure the best financing terms for your purchase.