How Do Lenders Set Car Loan Interest Rates?

When you are in the market for a new car, you should look for the best car loan interest rates in your area — these will affect how much you ultimately pay for your car. The higher the interest rate, the more you will pay in interest over the life of the loan.

Much of what determines car interest loan rate depends on factors that you don’t have any control over. Once you understand how the loan rates work, you will have a better understanding of what kind of rate you can expect to be offered, and why.

1. How Does the Prime Rate Affect Car Loan Interest Rates?

The prime interest rate is one of the main tools that banks use to determine the interest rates they offer to customers for car loans and other products. The prime interest rate, published by the Wall Street Journal, is determined by the interest rates offered by the ten largest banks in the United States.

The rate changes after seven banks on the list change their interest rates. The prime interest rate is one of the biggest factors for determining the best rate that banks offer to customers.

2. How Do Market Conditions Affect Car Loan Interest Rates?

The economy also affects auto loan rates. When the economy is struggling, interest rates are lower. One reason for this is that the prime interest rate is influenced by the federal funds rate set by the Federal Reserve. When the economy is not doing well, the federal funds rate is lowered to help the economy recover. The rate goes up if the Fed is trying to prevent inflation.

Additionally, dealers might offer 0 percent financing when the economy is bad to encourage people to buy new cars instead of used cars. The interest rates do affect how much people can afford to spend on a car. The auto industry tries to offset this by offering better financing rates than you can find through your local bank.

3. What Other Factors Will Affect My Rate?

In addition to general market conditions, there are a number of other factors that can affect your car loan interest rates. Some lenders will vary the rate based on the age of the car. Often, newer cars have lower interest rates. Not all banks will do this, but you might be able to save money by shopping around.

Another factor is your credit score. In order to qualify for the best car loan interest rates, you do need to have a good credit score. Not all banks will set their interest rates on the prime rate, and you might be able to find a better interest rate at a credit union versus a bank.

Finally, the interest rates vary based on the region of the country that you live in. Some of these factors you have control over, while others you do not — but either way, it pays to be prepared.