Understanding Auto Loan Interest Rates

Monday, March 5, 2012 10:31am
Interest rates
Car financing and the world of interest rates can be confusing, intimidating, and downright aggravating, but if current and prospective borrowers equip themselves with knowledge, auto loans can be tamed and used for a borrower’s highest benefit.

Auto loan interest rates act a bit differently from interest rates for other types of financing. Mortgages, for instance, have fluctuating averages that are updated daily. Then depending on credit scores borrowers know what general interest range they will likely qualify for. Business loans come with rates dependant on a borrower’s business or business model. Car loans, on the other hand, mix both of those approaches. The interest rates offered on car loans fluctuate depending on the market averages, but also teeter on other factors, such as the age of the car and the region of the borrower’s residence.

Credit Score Reigns Supreme

Still, however, the most influential factor in determining the interest for car financing is credit score. Credit score reigns supreme in the lending world since it tells lenders exactly how risky their decision is to lend money to an individual. Borrowers who look at average auto loan rates can determine how likely they are to acquire those low numbers depending on what their current credit score is.

Good credit scores are those in 700 range and higher. If borrowers expect to obtain the lowest interest rates possible, they should work towards a 700+ credit rating. If time is of the essence, sometimes a co-signer can offset a low score and incentivize a lender to grant a lower interest rate.

Extend the Term

Taking an auto loan out for a shorter period of time will also help reduce the rate. Lenders seek to reward those who will tie their money up for the shortest period of time with lower rates. It is also a sign of reduced risk if a borrower is willing to repay money over a smaller window because it tells the lender that a borrower has a larger cash flow.

The downside to shorter loan terms is that the monthly payment will almost always be higher. But if a borrower is willing and able to pay back their vehicle financing over a shorter time frame, they will be rewarded with reduced interest payments.

The Collateral’s Age

Finally, lenders are less willing to grant lower interest rates to newer cars. Borrowers want new cars and they tend to put forth an effort to take care of new cars. Consequently, lenders know their collateral will be taken care of if a borrower is financing a new vehicle, so they are more apt to grant lower rates for such a purchase.

A Whole Mess of Other Options

But auto loan financing is unlike any other types because there are so many incentives and lending sources available. Dealers, for instance, often offers zero percent financing (something no bank or credit union would ever do), but such deals come with their own risks, drawbacks, and fine text.

Others offer discounts when old vehicles are traded in, or when certain amenities and upgrades are purchased. Some lenders and dealers host special, region-specific interest rates in an effort to bolster purchases where they are lacking.

The world of auto loan interest rates can be confusing and riddled with obstacles, but if borrowers understand why interest rates are assigned the way they are, then they can make an effort to obtain the lowest rate possible. Using online forms, such as the one on this site, can allow borrowers access to multiple quotes from multiple lending sources all at the same time—granting the ability to select the best opportunity available.