What are the Basics of Auto Loan Interest Rates?

The experts at City Lending can be a big help guiding you through this cumbersome and sometimes confusing process - and helping you get the loan that's the best option for you.

At City Lending, we look for car owners that are paying a high interest rate, but have improving credit. We can almost always help people who meet those criteria. Just give us a call at 800-391-4346 and we'll be happy to walk you through the lending process.

Most auto loans come with fixed rates affected by the Federal Reserve System's decisions to raise or lower its interest rates. When the Fed raises its rates, the interest rates lenders offer go up. And when it lowers its rates, rates lenders offer go down. And make no mistake - the rates offered will vary with the lending institutions. Once you are into a fixed-rate loan, your interest rate will remain the same over the term of your loan. City Lending can help you pre-qualify for a loan so you can go car shopping with confidence!

A lender will look at the following criteria to determine the interest rate of the loan they offer you:

  • Credit score - First and foremost, lenders look at your credit score before they offer you an interest rate. The higher your credit score, the easier it will be to get a favorable interest rate because you are considered less likely to default on your loan. It's that simple.
  • Price of the vehicle - Correlates directly with the amount of the loan you will qualify for. Obviously, if your credit is shaky, you won't be buying a Maserati.
  • Age of the vehicleM - Generally, interest rates will be lower for newer cars, because the vehicle's resale value will be higher if the loan is defaulted upon.
  • Your debt-to-income ratio - How much money you owe your creditors compared to the amount of money you earn.
  • Down payment - A bigger down payment reduces the size of the loan, which in turn helps lower your payments.
  • The term of the loan - Lengthening the loan duration can help you bring your payments down. But there's a trade off - you will be making payments for a longer period and the overall interest paid increases. The average term of a car loan is four or five years. Always try to keep the term of the loan as short as you can afford.

When you shop for a car loan, the most important figure is the annual percentage rate (APR). The APR is the percentage a lender requires in interest when you borrow money, calculated over a one-year period. A percentage point or two can make a big difference in the amount of money you pay over the term of your loan. For example, a 36-month, $15,000 loan at 5 percent APR would save you nearly $500 overall compared to the same $15,000 loan at 7 percent APR.

If auto interest rates decline, and your credit score is improving, it's a good idea to talk to City Lending about refinancing your vehicle.