If you have to finance a vehicle, one of the primary concerns you have is what interest rate you will get. Besides the lender’s policies on the amount it will lend and the term available for the loan, this is the single most important factor in determining what your payment will be.
The problem with trying to predict your auto loan interest rate is that there are several factors that converge to determine what you qualify for. Of course, one of the biggest factors is your credit score. Credit scores below 700 will find it much more difficult to secure a low-interest car loan than those with higher scores. You may also find it difficult or impossible to secure “prime” financing, such as those rates advertised on television such as 0% for 48 months. You can find your credit score at several websites such as freecreditreport.com, but you will often have to sign up for a service, such as credit monitoring, to get your “free” credit score. Another way to obtain your score is to ask your banker or other financing agent to get you a copy, but be careful; too many inquiries in a short time can also lower your credit score.
Another factor affecting your interest rate is the term of your loan. There are two schools of thought on this effect. One says that a shorter term will result in a lower credit score due to your ability to pay more each month. The other says that financing for a longer term will result in a lower score, due to the fact that the lender will receive more in interest. In order to find out, you should ask the lender for a quote on the shortest term you can manage payments for and the longest, and compare.
Most “good credit” car loans now are averaging about 5.65% for 48 months. However, this figure will increase significantly depending on the lender, the term, and your credit score. 11.5% is typical for an average credit score. As you can see, there is tremendous variety in interest rates, so it pays to shop for your best rate.
Keep in mind that interest rate only matters when you compare the same terms. Taking a loan at 8% and paying it off in 48 months will probably save you more than a loan at 7% for 60 months. One trick you can use to your advantage is to figure your maximum monthly payment, then finance for the longest term at a lower payment. However, pay the maximum each month; the excess goes directly to principal, actually saving you interest in the long run. To calculate payments at various interest rates, visit www.bankrate.com. This website has a variety of calculators that are easy to use. You can run various scenarios and even print an amortization table, which will help you calculate how much you can save by paying extra on your payment each month. You can significantly reduce the overall amount you pay for your car by paying extra principal each month.
- What is a Good Interest Rate on a Car Loan?
- What is a Good Interest Rate for a Loan on a Car?
- What is the Average Interest Rate on a Car Loan?
- How to Get a Car Loan?
- How to Refinance a Car Loan?
