It pays to compare car loan interest rates. It also pays to know what those car loan interest rates are based on. So that you are not scratching your head wondering why another person, who makes the same income you do, got a better interest rate.
Be Sure to Check Your Credit Score
You credit score helps financial institutions determine the risk in offering you a loan. The higher your credit score, the better the chance a financial institution will make you a loan with a reasonable rate. Many things play into this including your income, how long you’ve been at the same job, how long you have lived at the same location and your current debt.
Credit Score Ranges
All the above information affects what loan institutions will charge you, but in general, if you have a credit score over 700 a car loan will run you under 8%. If in the 600 range, you will pay roughly from 8% to 10%. If in the 500 range or below you will pay in the double digits for a car loan, as high as 20% or more if you are a severe credit risk. In which case, contact a lender who offers what are called bad credit auto loans.
Type and Length of Car Loan
Car loans typically run for the following (however, you can get shorter or longer loans):
- 3 years or 36 months
- 4 years or 48 months
- 5 years or 60 months.
These time frames also affect loan rates. From the lender’s perspective, the shorter the loan the less the risk so they can offer a slightly lower rate. But for you, the buyer, the longer loans represent a smaller monthly payment. The tradeoff is that the longer loans will cost you more in interest.
Online versus Bank/Credit Union versus Dealer
Here there is no clear answer. Although in general, if you have a good working relationship with your bank or credit union, start there. Next use the Internet. This is the beauty of the online world, you can view many loan rates. Just be sure you are comparing apples to apples. For example, a loan for 3 years or 36 months will generally have a lower rate than a loan for 5 years or 60 months. However, don’t necessarily rule out the dealer. Sometimes dealers are aligned with financial institutions that provide great rates to get a slower moving model out the door. This is particularly true with new cars. We’ve all seen the ads for 0.0% financing.
Use a Comparison Chart
Use the following website to get a look at current car loan rates, http://www.bankrate.com/auto.aspx. Also pay attention to the car loan rates on their right-hand sidebar to see averages for used and new cars based on months financed. They will ask you for your city and state and then provide you information on banks in your area. Use this as a guide. Going here, though, at least provides you with some knowledge of what is being offered.
Knowing the above information puts you in the driver’s seat (and maybe literally). You will know what you qualify for, the length of the loan and typical interest rates.
