4 Facts About Auto Loan Rates

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, - May 27, 2016

When shopping for an auto loan, rates offered by different lenders will vary widely for a number of different reasons. Some lenders are more competitive than others in that they offer lower rates in certain circumstances. Other lenders charge higher rates, but make loans available to borrowers other banks or lenders may not be willing to service. So, in order to understand how car loan interest rates work and how to find the most competitive car loans, there are a few facts regarding car loan rates that you should be aware of.

Credit Rating Directly Affects Rates

The interest rate that you are offered will usually directly reflect your personal credit rating and score. Simply put, banks and car loan lenders offer lower rates to people with good or excellent credit and charge higher rates of interest for people with bad or marginal credit. Your personal credit score is used as an indicator in determining the likelihood of a default on a car loan.

People with higher credit scores are viewed as more financially responsible and are considered much less of a risk than people that have demonstrated that they do not always meet their financial obligations on time. The difference in the interest rate charged to a person with a good or excellent credit versus that of a rate charged to a person with bad credit can range from as little as one or two percentage points to as many as 10 to 15 percentage points.

Shorter Terms Offer Lower Rates

Generally speaking, car loans that have a shorter term usually offer lower interest rates. For example, if you finance a car loan for five or six years, you will almost always end up paying a higher interest rate than you would if you had selected a repayment term of only two or three years. Banks and lenders view longer term car loans to be higher risk than shorter term loans. Therefore, banks are willing to accept a slightly lower interest rate for loans that are repaid more quickly. If you want to get the lowest car loan interest rates possible, always choose a term that allows for repayment of the loan in the shortest time possible - just make sure you can afford the payment.

Dealerships Often Profit on Interest Rates

Dealers not only earn a profit when they sell a vehicle, they can also earn money when you finance the car loan with one of their lenders. For example, if you apply for a car loan through the dealership, the lender may allow the dealer to charge you a higher interest rate than that offered. When this occurs, the dealership may increase the interest rate by as much as 2 or 3 percentage points and then receive the difference in the rate offered and the rate you finally agree upon. Depending, on the cost of the vehicle this could result in a profit for the dealership of a few hundred to a few thousand dollars. Of course, the dealer's profit is paid by you over the term of the loan in higher monthly car payments.

You Can Negotiate Rates

When dealing with the dealership, don't be afraid to try to negotiate a lower interest rate - especially, if you know you have good or excellent credit. If you believe the rate is a little too high, it probably is. If negotiations fail, take your car loan to a major bank or local credit union and get a better interest rate for your good credit car loan.

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