It is tough to find your perfect car but it is even tougher to pay for it. Being clear about your financial condition helps you in narrowing down available choices. You must be clear about how you will pay for it. It turns out that for buying your perfect car, you will need a financial jump start. Getting an automobile loan is an option but it is critically important to get the facts straight before hand. Such loans can cover whole or a part of the total cost of the vehicle.
It is crucial to choose the correct loan after analyzing your payment or funds raising capabilities for installments otherwise you may end up wrecking your credit score. When you apply for an auto loan, there is a possibility that your application might be denied. So be prepared for that also. Here is an insight to interest rates on automobile loans.
Interest Rates On Automobile Loans
The national average interest rate on automobile loans in the United States is 4.21% for a five year auto loan. Generally, the annual percentage rate for auto loans rangers from 3% to 10%. These rates vary for new and used vehicles. And a number of other factors are responsible for a rate set by the lender.
Factors That Affect The Interest Rates
A number of factors are examined by the companies that offer auto loans. These might come with pre determined conditions such as securities or collaterals, etc. Following are a few of the main factors that help in ascertainment of an interest rate.
1. Credit rating
Borrowers who have a high credit score are approved for loans at a lower interest rate than the ones who have a bad credit score. However if you are a first time borrower, you would not have a credit score, so make sure your financial history looks good. The Lender examines your financial history thoroughly. This may include monthly bill payments, debt defaults, bankruptcy, and so on.
2. Length or the term of the loan
The term of the loan is directly proportional to the rate of interest it may carry. It means, longer the term of the loan, the higher will be its rate of interest. Although, they carry high rates, longer term periods allow lower monthly payments. So, you have to decide your preference. Lenders generally provide loans for a period of 24-72 months.
3. Life Of The Vehicle
Whether you have a new vehicle or a used vehicle, or how much you have used your existing vehicle matters in the determination of the interest rate it will carry. Generally, new vehicles carry lower rates of interests than old vehicles. New cars have a more predictable resale value. This predictability leads to lower rates of interest. Some lenders do not give loans for used or old vehicles.
4. Down Payment
The benefits of a down payment continue throughout the life of the loan. It shortens the loan term, hence reduces the monthly payment and may even lead the lender to give you a better and lower interest rate.
Different Rates Charged By Different Lenders
Banks: Auto loans carry low rates of interest in case borrowed from banks. These might be as low as 2 to 3% or as high as 20 to 25%, depending on customer to customer and other factors.
Credit Unions: The loans granted by the credit unions carry even lower rates. However, some credit unions have memberships. These memberships are restricted to some professions or social groups, and so on.
Dealerships: Auto companies provide dealerships and loan financing options to people who buy from their dealerships. This is a relatively new way of financing purchases and is widely becoming popular at an increasing pace. The interest rates of these options range from 0.5 to 0.9%. This is basically a competing strategy.
Financing Companies – these provide financing for consumer purchases. But most of these do not accept deposits. They provide specialized services to customers who have good credit scores and ratings.
Car Dealers – they themselves do not lend any money but act as agents for third party lenders. However, they are paid by the lenders for their services. This type of financing is not advisable since it might bring high profits to the dealer rather bringing the best deal to you.
The Bottom Line
Only a few buyers can afford to pay in cash for their auto purchases. It is fine to opt for other financing options. For doing it correctly, you must learn the language of lending. Know what is being offered to you and choose carefully after analyzing where you stand, financially. Find out in advance about what happens after finalizing a deal and prepare yourself for it.
The interest on auto loans change frequently due to the dynamic business environment. Therefore, one should keep a track of them. Interest rates influence your monthly payments. Getting it pre approved directly with a lender helps you to negotiate the best auto loan rate. This helps you in saving you hard earned money in the long run.