Interest Rates On Auto Loans

Learn About The Interest Rates On Auto Loans And Why They Are There

Why are there interest rates?

The interest rate is the primary way that the bank will make money on your loan. Just as you are using the money that they give you to buy your car and hopefully improve your station in life, they are constantly making sure that every dollar is optimized to get them the best possible return. Banks spend money to make money. By ensuring that you will pay them back a higher overall amount of money than they gave you, they are ensuring that they will make a handsome profit on your loan.

Different interest rates for different situations

Based on a carefully calculated set of stipulations and guidelines, most banks have come up with several different auto loan interest rates. For purposes of figuring which interest rate your car loan will fall under, the primary deciding factor is the car itself. Buying a brand new car from a dealership will get you what is sometimes referred to as the "base rate." Buying a used car gets you a higher interest rate, sometimes as much as a whole percentage point higher. Some lenders further graduate this scale to include more than just "new" and "used" cars, but the end result is still the same: the older the car, the higher interest rate you pay.

Other deciding factors

More goes into figuring your interest rate than just the age of the car. The other important factor is the length of the loan. Taking a higher number of years to pay off the loan will also result in a higher interest rate. This is the bank's way of saying that if they're going to have to wait longer to get their money back from you, then they want to make more money off of you overall. Also, remember that the longer you take to pay back the loan, the more money you are paying on interest anyway. This means that it is almost always in your best interest to pay off the auto loan as quickly as possible. As for the new car or used car, that all depends on your situation. Used cars almost always have lower initial prices though, so they may be your best bet if you want as cheap a loan as possible.