How Does Car Loan Interest Rate Work? Learn The Basics Online Now

Here's Is What You Need to Know About Car Loan Interest Rate

Before you are out to apply for a car loan it is important for to know how car loan interest rate works. It will help you to understand the entire gamut of car financing as well as what to expect from lenders when exploring various options that are available at your disposal.

AutoLoansForEveryDriver can help you to learn the basics of auto financing through a totally simple, easy and hassle-free process.




What Lenders Consider When Calculating Car Loan Interest Rates?

The way in which car loan interest rates are calculated by lenders is a subtle process. However, the following factors assume significance as they provide lenders with detailed information about an applicant for determining interest rates that can be offered.

Credit history : The existing status of borrower’s credit rating is the most crucial parameter when it comes to calculating auto loan interest rates as it tells lenders whether a probable apppcant will be able to pay back the auto loan or not.

Types of interest rates : Usually, there are two types of interest rates charged by car finance lenders – simple interest rate and compound interest rate.

Debt-to-income ratio : DTI ratio is another vital factor which can play a pivotal role in calculation of interest rate charged by lender.

How Simple Interest Rate Works

Commonly, simple interest rate is charged by loan dealers for providing loans with shorter durations to borrowers for purchase of new or used cars. They are calculated by using principal loan amounts.

How Compound Interest Rate Works

Calculation of compound interest rate can be a complicated task as it will take into consideration principal loan as well as simple interest rate on a monthly, quarterly, bi-annual and annual basis.

Know Factors That Affect New and Used Car Loan Interest Rates

The level of interest rates provided for buying used cars could be at great variance with those offered for purchasing new cars. There could be a number of reasons for this. Soem of these may include the below mentioned aspects.

  • Borrower’s financial situation.
  • Quality of cars and their resale values.
  • Demand and supply position in the market.
3 Simple Guidelines for Finding the Best Car Loan Interest Rate

It could be easier for you to qualify for the lowest and best auto loan interest rate for your specific financial and credit circumstances if you follow the below steps.

  • Check for special financing rates : You can contact specialized online lenders and study special car financing rates being made available for buying new or used cars.
  • Check bank rates : You can also find out what type of interest rates being provided by traditional lenders like banks and credit unions.
  • Demand the "buy rate" : In case, you are trying to get your car financed through dealership financing then you must ask for “buy rate”.
Free Quote