Car Financing FAQ: How Loan Rates Are Determined

Car loan rates vary quite a bit depending on the car, the amount you borrow, and the interest rate that applies to your loan. Figuring these factors out does not always take an accountant, but these terms can become confusing quickly.

A new car loan will often times carry with it a better interest rate than a used car since you are getting a new car from a trusted and certified dealer. Many dealerships have their own interest rates, along with deals, and other car options that can help you lower your rates if you have a qualified credit score.

Your credit score also plays a huge part in figuring out your interest rates as a person with higher credit will get a better, or lower, interest rate than someone with a smaller or no credit score. A first time car buyer with no credit will, unfortunately, get a higher interest rate. But do not let that worry you if you have the finances to buy a new or used car, and a car can be a great way to build a reputable credit score.

Also, the length of your loan will make a difference in your interest rate. A longer term loan will carry a higher interest rate, while a shorter loan will have a smaller, or with zero percent financing, no interest for two, three, and now five year loans.

The amount you borrow varies widely depending on the car you want. A new, fully loaded, luxury vehicle will, of course, mean a much larger loan than say, an economy vehicle with a basic trim package. The more you borrow, the higher the interest rate, unless you buy a new car on a short term loan.

Oftentimes, the dealer at which you bought your car will have some of the best rates since they use their own lenders. Many times, a larger dealership will take more of a risk than a bank, credit union, or even a private lender since they can offer car maker's zero percent financing for qualified borrowers.

Taking these three things into consideration when you are shopping for the best car loan rates will help you figure out the best rate for you to get the car that best fits into your budget. Keep in mind that prepaying your car loan does not raise your interest rate, and that paying your monthly loan on time helps build credit.

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