How to Tell If the Auto Loan Rates You're Getting Are Reasonable

Auto financing can add up to a significant chunk of the price tag on your new car. The cost of borrowing is called the interest and on a vehicle this can be hundreds or thousands of dollars. The only way to reduce this amount is to get financing at a lower rate. But how can you tell if the auto loan rates you were offered are fair?

Before you can make accurate comparisons you should take a look at the factors that affect your interest rate eligibility. Some things can lower your interest rate and other things can raise it. Make sure that this criteria matches from one loan offer to another for an accurate idea of the auto loan rates being offered to you.

What Affects Auto Loan Rates?

The interest that lenders charge is the cost of borrowing money. Before you can do some comparison shopping, you need to have a good understanding of the factors which affect the auto loan rates you are offered. Knowing what goes into this number can help you compare your rate with other offers in an accurate way.

Use the same criteria on each loan you apply for to accurately compare how every rate you get stacks up against the others. This way you can be sure how the auto loan rate you are getting compares with other lenders. Ignoring these factors makes it impossible to fairly compare the rates you are eligible for.

Interest Rate

The interest rate that financial institutions charge fluctuates based on the health of the economy. During times when the economy is strong interest rates are raised to encourage people to save their money. When the economy is struggling rates are dropped to encourage the spending that helps the economy recover.

This part of the interest rate is the federal funds rate and it is adjusted by the Federal Reserve. The federal funds rate has an impact on the prime rate that lenders use to determine how much interest to charge on most loans. The prime rate is about 3% higher than the federal funds rate but it can vary from one lender to another.

This part of auto financing is usually beyond your control. The interest rate your lender uses is where you can make some comparisons between your auto loan options. If the interest rate is low, and the other factors of your loan remain the same, then that’s a lender that will probably give you a good rate.

Credit Score

A credit score is a numerical representation of the risk that a person poses to a lender. It is based on previous payment patterns and financial information. Lenders use credit scores to assess how likely a borrower is to repay the loan on time. Be sure that the credit score a lender assigns to you is accurate.

Individuals with high credit scores pose the least amount or risk and are offered the lowest interest rates. A low credit score indicates to a lender that an individual may be less likely to make payments as agreed. There are costs associated with late or missed payments and the higher interest rates are meant to offset those costs.

Loan Term

The loan term is the amount of time that a borrower has to pay back a loan. A long term loan means lower monthly payments that will be made for a longer amount of time. Long auto loan terms mean higher interest rates.

A short term loan is the more economical option. While monthly payments may be higher, the loan will be paid off faster and at a lower rate of interest. Over the life of the loan there is less interest paid overall on short term loans.

Principal Amount

The principal amount is the amount of money being borrowed. This amount is not the same as the loan total. The amount of the loan is always higher as it includes the principal amount plus the interest being charged and any additional fees.

More money being borrowed means more interest being paid. The interest rate is applied to the principal amount as a percentage. A larger amount being borrowed often means paying more over the life of the loan.

Where To Comparison Shop For Your Loan

Once you understand how the auto loan rates you are offered have been calculated, then you can begin comparison shopping. The best thing to do is to apply for the same loan with other lenders. Make sure the term and principal amount are the same and verify that each lender is grouping you into the same credit score bracket.

Your Local Bank

Banks are a fairly reliable benchmark of the current going rate. The prime rate can vary from one bank to another but these fluctuations are generally very small among reputable banks. It’s a good idea to visit your local branch when you’re comparing auto loan rates.

Take The Search Online

One of the easiest ways to get numerous quotes for comparison quickly is to take your search online. You can manually apply to multiple lenders and see what rates you qualify for with each of them. Or you can save a lot of time and use a website such as myAutoloan.com and get four offers with the click of a button.

The Dealership

Car dealerships often offer financing too. In most cases this is not a good choice for auto loan rates. The dealer is the middleman and prices of financing are usually marked up. However dealerships do occasionally have special promotions and deals that you can take advantage of. Since you’re there buying a car anyway it couldn’t hurt to ask what rate the dealership would be willing to give you.

It pays to be thorough when you’re shopping for car financing. Auto loan rates can vary substantially from one lender to the next. Explore the options available to you and you can save a substantial amount of money.

Use the same criteria for each loan application to ensure that you are accurately comparing each borrowing option. Check with different types of lenders to see how they stack up against one another. Be sure that the auto loan rates you were offered are at a reasonable price and choose your loan with confidence.