How Do Auto Loan Rates Work?

Published On:
January 31, 2020

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When you're on the hunt for a new vehicle, one component of your auto loan you want to keep in mind is the loan rate. 

Why is this so important? Your auto loan rate can significantly impact the amount you pay monthly for your vehicle and over the length of your loan. While you may regularly hear auto loan rates discussed, how much do you know beyond the basics?

Understanding Credit Union Auto Loan Rates

Although you likely understand that you want the lowest rate possible, and your credit history impacts your score, there's more to the story. Keep reading to learn some lesser-known details about auto loan rates and how credit union auto loan rates differ from what traditional lenders offer. 

Interest Rates Fluctuate

Your auto loan lender, whether it's a bank, credit union or dealership, can set rates as they choose. This is because there's no set interest rate for auto loans by the Federal Reserve, as they do with mortgage interest rates. 

No matter when you purchase your vehicle, always check rates in advance to give you an idea of what a reasonable interest rate is, so you can start the process prepared.

They Use Simple Interest 

Did you know there are various ways to compute interest for a loan? Auto loans use simple interest.

When simple interest is used, you pay a flat percentage of the amount borrowed, and your payments go towards that month's interest requirement first. Any remaining amount applies to the principle. 

Simple interest allows your payment to stay consistent, with the same amount going towards interest and the principle each month. This is only true as long as you make your payments on time and don't accrue late fees and penalties. 

The Difference Your Auto Loan Rate Makes

Now that you know three significant pieces of information about an auto loan rate, it's beneficial to see how your interest rate can impact how much you pay. 

Here's an example based on the current average auto loan interest rates if you purchase a new vehicle with a 60-month term for $34,000.


Interest Rate: 7.02%

Monthly Payment: $674

Total Paid Over 60 Months: $40,414

Total Paid in Interest: $6,414


Interest Rate: 3.60%

Monthly Payment: $620

Total Paid Over 60 Months: $37,203

Total Paid in Interest: $3,203


As you can see, when your interest rate increases by less than 3%, you can find yourself paying more than double the interest over the life of your loan. 

That's why you must get the lowest interest rate possible. It can save you hundreds or thousands of dollars over your loan term. 

How Credit Union Auto Loan Rates Differ

While you have your pick of banks and dealerships as your lender for your auto loan, credit unions stand out as a top option for many reasons. 

Your local credit union will generally provide the lowest interest rates to their members. They are also known for offering fantastic customer service and getting to know their members personally. 

Credit unions offer flexible payment schedules and are more accommodating with who they approve for a loan. If you have any questionable spots on your credit history or you're still working to build credit, you can consider a credit union for your loan. They will look at you as a person, not just an application passing through their system. 

You will need to qualify to be a member at a credit union, which is rather easy to do. Some credit unions base their membership on your location, job, or membership in a specific association. You can also sometimes join based on being connected to someone who is currently a member of the credit union. 

Don't let the membership requirements deter you from experiencing the benefits of getting an auto loan from a credit union. 

Be Knowledgeable About Getting The Best Auto Loan Rate 

Now that you know more about how auto loan rates work, the difference they can make in your loan, and how credit union auto loan rates differ from the rest, be sure to use your knowledge to get the best auto loan rate you can. 

The lender you choose and the choices you make related to your loan terms can significantly determine the quality of the loan you receive and the payment amount you make. 

At Arbor Financial Credit Union, we want to help you get a loan that works for you. 

Learn more


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