Getting the Best New Car Loan Rates

March 18, 2013

Tips on determining loan terms, recommended down payments, and choosing the right length to get the best car loan interest rates.

When planning to purchase a new car, several factors have to be understood to ensure that you are getting the best deal. The best new car loan interest rates are the primary things to look for. The interest rate will determine how much you are going to pay for your car in the long run.

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Knowledge Is Power
Determine the existing prime interest rate. The prime interest rate is dictated by the federal government, depending on economic conditions. If the prime rate is low, it is usually a good sign to apply for a new car loan. Credit unions and banks will likely have a similar interest rate that reflects the low prime rate. If prime rates are high, it would be best to wait for interest rates to subside before making your purchase. Credit unions may offer a lower rate, but it would all depend on your credit score, employment history, past debts paid and the amount of down payment you are willing to pay.

Remember that dealers serve as middlemen between the buyer and the car manufacturers. Be wary of 0 percent interest offers when buying a new car, as this usually requires a large down payment or extended loan terms that translate to a higher interest rate overall. Loans of 7 or 8 years with low down payment plans are used to entice buyers to make a purchase, but this translates to higher monthly payments and a higher interest rate overall.

Determining Loan Terms

It would be best to consider a shorter loan term of 3 to 4 years, as this is the right balance between paying for your new car and the overall depreciation of the car over its service life. This makes the car easier to re-sell, as remaining service life is still acceptable, compared to a 7 or 8 year loan term, with the car past its depreciation value by the time the loan is finished.

Down Payment

The best new car loan rates are also dictated by the amount of down payment you are willing to part with. Again, consider the fact that 0 down payment offers at new car dealers are designed to entice you to sign on the dotted line, absent the knowledge that the deal requires high monthly payments and increased interest rates. A sufficient down payment is a good sign to lenders, as this represents a low risk scenario, wherein you are willing to part with a significant amount of money. It is good to save some money for a down payment, which translates to a lower loan amount, lower monthly payments and low interest rates. A down payment of 20 percent is considered to be very good.

Where You Live

Current car loan rates may vary based on where you live. Bankrate.com provides general car loan rates around the country. A 60-month car loan runs an average of 6.987 percent in the Colorado Springs area. The same loan in the greater Los Angeles area runs an average of 9.34 percent. In New York City, the same loan would is an average of 8.4 percent. Typically, at the time of this writing, current car loan rates vary from 5.00 percent to more than 11.00 percent.

Your Credit Score

More than anything the biggest price gap in car loan rates will be based on your credit score. Credit scores run between 300 and 850. 850 means you are an extremely reliable credit risk. 300 means you are a terribly poor credit risk. The high 600 range into the low 700's is probably about normal. Under 600, and you are getting into dangerous territory. You may be able to get a car loan, but the interest rates will be go up and in some cases can go extremely high (interest rates in the 20 percent range). If your credit score is in the 500's or below, you may have to settle on a bad credit car loan, or not being able to get a car loan.

See what kind of interest rates you can get >>

Get a copy of your credit report. Remember, whenever a car loan is asked for, lenders will first check the credit record. What is discovered in the record has a direct influence on deciding car loan interest rates. You will be best served to check your credit report and ensure that facts included in it are correct and up-to-date. Any discrepancies found should immediately be reported to credit bureau and readjusted.

Length of Car Loan

On a 60-month car loan, for a $20,000, at a high interest rate of 18.00 percent, you will end up paying half again as much for your car. In other words, your $20,000vehicle will have cost you over $30,000. If you drop that to a 48-month car loan, paying it off a year sooner, you will save yourself over $2,000in interest, but your car payment will jump from $508per month to $588 per month.

Interest Rates

Use Bankrate.com's low interest auto financing calculator to see how you can lower your payment and see the interest saved. The difference on a $15,000 loan with 0 percent interest, compared to a loan with 6 percent interest, amounts to a savings of over $2,200 over the life of the loan. Compared with a 9 percent loan, you would save over $3,400. Use of this calculator also provides a bar graph that highlights the dramatic savings. Just press the calculate key once you have entered the numbers you want to work with.

See what kind of interest rates you can get >>

New Car vs. Used Car Loan Rates

Generally, new car loans are cheaper than used car loans. Be sure when comparing interest rates that you are comparing them for the same car and for the same terms.

Annual Percentage Rates (APR)

The annual percentage rate of a loan is the interest rate calculated for a full year. In most cases, car loan lenders provide you with the interest rate on a per month basis. This can make it somewhat deceiving. A 0.3 percent monthly interest rate seems like a minimal interest amount, but the per year interest is actually significantly higher than that. Calculating the APR for your new car loan is relatively simple when you follow the formula listed below.

Annual Percentage Rate (APR) = per month interest rate x 12

Thus, if your per month interest rate is 0.3 percent, the APR for your loan is actually 3.6 percent. You'll pay off about 3.6 percent of the loan annually. While it may seem easy to select a loan based upon the APR (simply select the loan with the lowest APR), there are a number of other considerations to keep in mind that may affect your total repayment plan. APR is often inclusive of other fees and interest rates, and it is thus not a completely reliable way of determining the loan repayment rate. For this reason, the Annual Percentage Yield is also a valuable tool.

Annual Percentage Yield (APY)

APY is the yield the loan accrues in a given year. This helps to determine how the interest rate affects the total amount of money to pay off a car loan. Unlike APR, APY takes compounding interest into account. Simply put, the portion of the loan you repay in January earned a certain amount of interest you have to pay off at a later date. Therefore, your February payment is affected as well. This information is not accurately reflected by an APR calculation. To calculate the APY for your new car loan, follow this formula:

Annual Percentage Yield (APY) = (1 + r/n)^n - 1

In this formula, r refers to the annual interest rate and n refers to the number of times that interest is compounded in one year's time.

Calculating your new car loan can be a difficult task, and many lenders do not help to make the process easier. If you have further questions about how to calculate a loan rate, consult with your bank or a personal accountant for additional assistance. Taking the time to ensure you have the best loan for your purchase can save you a good amount of money down the line.

It pays to shop around. Where you live, your credit rating, length of the car loan, new car or used, all play into finding the best new car loan rates.

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