How is Your Interest Rate Determined?

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.

, - September 21, 2018

There are five main factors that determine someone’s interest rate. Each one can either increase or decrease the percentage rate, and you won’t be able to know what your interest rate is until you’ve gone through most of the car buying process. So, it’s important to know how they work together, and what you can expect.

The 5 Factors of Determining Your Car Loan Interest Rate

Your interest rate varies by lender and their specific requirements. But, there are five constant factors that determine someone’s interest rate:

  1. Lender
  2. Credit score
  3. Vehicle selection
  4. Down payment
  5. Loan term

Choosing the Right Lender

Working with the right lender is important. Because everyone’s financial situation differs, it’s important that a borrower works with a lender who can offer them a competitive interest rate given their credit situation. They can finance through a dealership, bank, or credit union. Dealers offer more incentives for car buyers, but banks and credit unions can typically offer more competitive rates, especially if they have a good relationship with them.

Your Credit Score

It’s true that the better someone’s credit score is, the lower the interest rate they can get. According to ValuePenguin, the average rates for 60-month loans on new cars in 2018 are vastly different depending on someone’s FICO credit score. For example, subprime borrowers saw an average rate of 14.06 percent, while borrowers with good credit saw an average rate of 4.95 percent. That’s over a 10 percent difference. Although the interest rate is higher for consumers with lower credit scores, over time these borrowers can raise their scores with on-time loan payments so they can qualify for better interest rates in the future.

Your Vehicle Selection

The type of vehicle a borrower finances impacts their interest rate, as well. New cars typically come with better rates, and are the only type of vehicles that qualify for zero percent financing. Used cars typically come with higher rates than new ones because they’ve been driven before and hold a lower resale value.

Down Payment

A down payment is almost always required if the borrower has bad credit. Borrowers with bad credit should be prepared to put at least $1,000 or 10 percent of the vehicle’s selling price down, whichever is less. But, regardless of the credit situation, a down payment benefits all borrowers in the long run by reducing the loan amount and interest charges. Be prepared to set money aside for one – the bigger the down payment, the less you end up paying.

The Loan Term

While the average car loan term is around 72 months, these longer loans don’t help save money on interest charges. Everything else being equal, the longer the loan term, the higher the interest rate. If borrowers are able, choosing a shorter loan term may help them get a lower interest rate, and it will definitely lower the interest charges they end up paying. Borrowers also decrease the risk of being upside down on the vehicle for longer if they keep the loan term as short as possible.

Keep in mind that adjusting each one of these factors may affect the overall interest charges on an auto loan.

The Bottom Line

Interest rates can vary depending on the lender, vehicle, down payment, credit score, and loan term. It’s important to know what affects your interest rate and how you can work to get the best one possible. If you find yourself struggling with bad credit and need an auto loan, let CarsDirect guide you. We work with a nationwide network of dealers that have the lending resources available to help people in unique credit situations. Our process is free of cost and obligation. Get started by filling out our online auto loan request form today.


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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.

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