Advice
ByChantel Wakefield02/08/2023 4:00pm
Quick Facts About Car Loan Interest Rates
- Higher interest rates bring higher monthly car payments, while lower interest rates mean you’ll pay less each month.
- The U.S. Federal Reserve sets baseline interest rates across the nation to support a healthy economy.
- Credit unions often have better interest rates for members compared to other lenders.
When planning to finance a car, you’ll find that the best loan deals depend on many considerations. The bottom line is affected by your credit score, down payment amount, the length of the loan, and economic conditions. It’s vital to remember that the interest rate on your auto loan makes a big difference in your monthly car payment and the overall cost to own the vehicle.
Each lender offers different rates to qualified borrowers, but who has the better deal for you? Here are some factors to consider when shopping for a loan, including tips on how to get the best interest rate.
- What Is Interest?
- Credit Unions
- Banks
- Dealerships
- Loan Fees and Additional Considerations
What Is Interest?
Most people borrow money from a lender to cover thecost of a vehicle. These auto loans are rarely given out for free. The fee for borrowing money for a loan is called interest.
Interest is calculated as a percentage. The interest cost is bundled into your monthly payment over the life of the loan. You’ll have a higher monthly payment when you have a higher interest rate, while lower interest rates mean you’ll pay less each month.
Factors that Affect Your Interest Rate
Overall, several factors will influence your interest rate on a car loan. These are the main contributors:
- Credit Score: Lenders assess how risky you are as a borrower before offering a loan. Your credit score is an indicator of this risk. Applicants with higher credit scores are seen as more favorable or “qualified” borrowers since they’ll likely repay the loan in full. Getting approved for a loan will be harder if you have a subpar credit score. If a lender does approve your application, the interest rates will be significantly higher.
- The Federal Reserve: You may have heard the term “the Fed” in relation to interest rates. This refers to theU.S. Federal Reserve, the United States’ central bank, which sets baseline interest rates across the nation to support a healthy economy. The Fed’s policies impact the lending rates offered by banks, dealerships, and other lenders. Even if you have an excellent credit score, the Fed’s action may still limit how low of an interest rate you can get.
- Economic Conditions and Forecast: The economy’s strength can impact interest rates, and market trends will play a big role in loan terms offered by lenders. Inflation can cause interest rates to rise, making borrowing more expensive.
- Competition: The competition among lenders can also impact interest rates. Lenders may match other advertised offers or even counter with lower rates to attract borrowers.
Credit Unions
Credit unions are owned and financially controlled by their members. This leadership framework often means lower costs and better rates for members compared to traditional banks and other financial institutions. While it may be more challenging to qualify for membership at a credit union, joining one can mean access to lower interest rates on your next car loan.
Pros
- Owned and operated by members
- Lower interest rates
Cons
- Often requires a credit score in the “good” or “excellent” range
Banks
Traditional banks, both large and small, offer car loans to customers as part of their overall lending services. They’re for-profit and usually have access to a broader range of financial products and services. For this reason, they can offer more competitive interest rates, which could work in your favor if you have a strong credit score. While it’s typically easy to apply online, some banks may have a more complicated application process and require you to submit paperwork in person.
Pros
- More financial products and services
- Competitive interest rates
Cons
- Longer application process for borrowers with subpar credit
Dealerships
Dealerships are arguably the most convenient option for financing a car. When you’re planning a big purchase, it’s nice to have a “one-stop shop” and do everything in one place. Bigger car dealerships often work with various national banks and lending partners to provide attractive financing options. Customers can also claim incentives and promotions when financing directly through the dealer, making it the more attractive route. Still, this financing option typically comes with higher interest fees — even if you have excellent credit.
Pros
- Many dealers include incentives, cash bonuses, and promotions when you finance with their lending partners
Cons
- Finance negotiations often take longer
Loan Fees and Additional Considerations
While interest rates play a role in the cost of a car, there are other fees to keep in mind. Sales tax, registration fees, and loan payment penalties can significantly affect how much car you can afford. See our guide on the hidden costs of financing a car to learn more.
Read Related Articles:
- How To Buy a Car From Out of State
- Can Two People Put Money Down on a Car?
- Top 5 Facts About Car Financing
