When shopping for an auto loan, rates offered by different lenders will vary widely for a number of different reasons. Some lenders are more competitive than others in that they offer lower rates in certain circumstances. Other lenders charge higher rates, but make loans available to borrowers other banks or lenders may not be willing to service. So, in order to understand how car loan interest rates work and how to find the most competitive car loans, there are a few facts regarding car loan rates that you should be aware of.
Credit Rating Directly Affects Rates
Be aware that two credit inquiries per year effect your credit score. Once you apply one place – be sure to have that credit report in hand
Consumers with higher credit scores are viewed as more financially responsible and are considered much less of a risk than people that have demonstrated that they do not always meet their financial obligations on time. The difference in the interest rate charged to a person with a good or excellent credit versus that of a rate charged to a person with bad credit can range from as little as one or two percentage points to as many as 10 to 15 percentage points.
Shorter Terms Offer Lower Rates
Typically car loans that have a shorter term usually offer lower interest rates. For example, if you finance a car loan for five or six years, you will almost always end up paying a higher interest rate than you would if you had selected a repayment term of only two or three years.
Dealerships Often Profit on Interest Rates
Dealers not only earn a profit when they sell a vehicle, they can also earn money when you finance the car loan with one of their lenders. If you apply for a car loan through the dealership, the lender may allow the dealer to charge you a higher interest rate than that offered. When this occurs, the dealership may increase the interest rate by as much as 2 or 3 percentage points and then receive the difference in the rate offered and the rate you finally agree upon.
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