You have too much to worry about to be bogged down by auto loans that are only out to make a profit at your expense. While auto financing is an unavoidable reality for some, searching for the best bank rates for auto loans can keep your finances balanced throughout the year.
When borrowers of used car loans and new car loans finance a vehicle from a lender, the financial institution considers the car “collateral.” The car is used as security, in the event that the borrower defaults on the loan.
Used cars are more likely to wear down and become inoperable due to age, condition and maintenance issues, which is why some lender increase the range of used car auto loan rates to protect themselves from this potential loss.
On the other hand, newer vehicles — while still facing an immediate depreciation just driving it off the dealership lot — does not pose as great of a loss, should the borrower be unable to make good on repaying their auto loans.
Some institutions like credit unions, however, offer the same interest rate regardless of whether the car is new or used. Going this route could save prospective used car buyers thousands of dollars during the life of the auto loan, so reaching out to a non-profit credit union in town can be a great benefit.
There are a number of factors that contribute to the auto loan rates you’ll be offered by a lender. Depending on where you undergo auto financing, however, interest rates may be negotiable.
FICO Score: A person’s FICO score is one of the most influential guides that lenders use to determine whether borrowers are risky to lend money to. Some banks and credit unions offer bad credit auto loans to sub-prime borrowers, but these interest rates typically reflect that borrowers have bad credit, as they tend to be exceptionally high.
Auto Loan Term: Another way lenders protect themselves and ensure that they get their money back on time and in less time, is to provide lower car loan rates for shorter car loan terms and slightly higher rates for longer terms. For that reason, borrowers who can afford it month-over-month should opt for a 36 month (3 year) repayment term if possible to take advantage of lower rates. Doing so, however, will lead to higher payments every month.
Vehicle Type: As shared above, the age of your vehicle can play an important role in what rate you’re offered. Another thing to keep in mind is that some lender differentiate specialty vehicles like motorcycles and RVs into different loan rate categories.
Down Payment: Having an adequate down payment can help do a number of things like lower the total amount you’ll need to finance (meaning less money spent on interest rates), and by directly affecting the auto financing interest rate, even with dealer financing. The generally accepted rule-of-thumb when saving up for a down payment is to have at least a 20 percent down payment to keep auto loan rates low.
Before you begin shopping for a car, it is important to know what auto financing qualifications you meet. Typically, auto loan rates are calculated based on the type of car you want to buy and your credit history. Additionally, you can get financing directly from a bank or have the dealer finance your auto loan.
Finding an auto loan brings up a lot of questions. Here's some of the questions we receive most often about car financing and auto loan rates: