Do you ever wonder about the 0% interest auto loan rates you see in car manufacturer financing ads? They are only available to select borrowers for limited loan terms. What about for you? What determines an auto loan interest rate?
Car Loan Rate Factors
A number of factors can determine the rate you’ll be offered on a car loan, including your credit score, the length of the loan, the condition and age of the car, and where you live. The largest factor of those is your credit score.
Your credit score is a numerical representation of your credit history. If you’ve handled credit well in the past by paying your bills on time, especially installment loans and credit card bills, your credit score will be higher. If your credit history is damaged or spotty, meaning that you haven’t paid your bills on time and/or don’t have much credit history, your credit score will be lower.
Getting Your Credit Score
Generally, borrowers with credit scores of 650 and above get the most favorable rates (Currently Mid Oregon is 640 and above), while those with scores of 550 and below get the worst rates. Before buying a car, obtain a copy of your credit score from a credit bureau or credit scoring company such as Fair Isaac, creator of the FICO score, at myfico.com.
Mid Oregon Credit Union members who enroll in online banking have access to their credit score for free, in our Credit Savvy resource.
Does the Length of the Loan Matter?
With some lenders, loans with shorter terms often get the best rates, while longer-term loans receive less-favorable terms. For others, like Mid Oregon, the rate is the same regardless of the number of months financed. You save money on shorter terms because you will pay fewer dollars in interest, so it’s often a better deal for you.
However, those where length of the loan factors in, it is another factor in determining the interest rates. Loans with shorter terms-24 or 36 months-get the best rates (Those 0% ads), while longer-term loans of 48, 60, or 72 months receive less-favorable terms. This is because the value of a car depreciates fairly rapidly; and the longer the loan, the less the car is worth. With lengthy loans of 60 or 72 months, there is a good chance that during the last one or two years of the loan, you will owe more on the car than it is worth. This is especially true when you put little or no money down.
Does New or Used Matter?
Interest rates for new car loans are can be lower than for used car loans. Again, Mid Oregon has the same rates for new or used. The amount we finance would be based on the used car value.
When certain lenders factor in higher used rates, this is because a new car holds its value better than a used car, which is more likely to experience mechanical problems than a new car. In some cases, your geographical location can also affect the interest rate you receive.