Business & Finance, Lifestyle

A Simple Guide to Auto Loan Interest Rates

Shopping for a new vehicle allows you the pleasure of dreaming about what your next ride will add to your lifestyle. Arranging the payments for your dream car, however, can be a loud wake-up call. To tackle your car financing anxiety, it helps to understand how interest rates impact your loan and how to plan for your payments.


The Total Cost of Your Loan

What makes your car loan interest rate matter is the effect it has on the overall cost of buying the vehicle. Let’s say you’ve chosen a new Acura for sale and decided to finance the purchase through the Acura dealership’s finance department. What will determine how much that car loan ultimately costs you?

The total cost of financing your auto purchase depends on three things: the amount of the loan, the length of the loan term, and the annual percentage rate (APR). The price you’re able and willing to pay and the number of years you’ll take to pay off the car are easily understood factors over which you have a good deal of control. The question of how low or high an interest rate you’ll get is more uncertain, and this factor can add thousands to the long-term cost of buying your car.

Factors that Affect Interest Rates

Having looked at how interest impacts your total loan cost, let’s turn to what affects the interest rate you can obtain. While you’d love to pay no interest at all, here on planet Earth you’ll have to settle for trying to get the lowest annual percentage rate you can find. Some of the things that affect your interest rate may be beyond your control, but let’s focus on two factors that you can do something about.

Credit Score

Your credit score gives potential lenders a guideline as to how creditworthy you are and how much debt you can handle. Naturally, it’s too late to raise your credit score when you’re sitting in the finance office, and that’s why it pays to prepare for car shopping in advance. You should request a credit report as soon as you start thinking about buying a new car. Once you know where your credit stands, you’ll know what you need to do to boost your score before you’re ready to head out to the dealership.

Dealer Promotions

Speaking of dealerships, which one you choose can make a big difference in terms of the loan terms you get, particularly the interest rate. You may have seen or heard dealer ads boasting great interest rates available only for a limited time or only for certain buyers. The second most important thing you can do to potentially decrease the APR of your car loan is to shop around. If you can find a dealer offering more favorable rates or get your preferred dealer to match an interest rate promotion offered by their competitors, you will decrease the pain that interest adds to your monthly budget.

Don’t Be Intimidated by Interest Rates

If trying to calculate auto loan interest provokes the anxiety of a high school math class for you, you’re not alone. The good news is that you don’t have to “flunk” when it comes to understanding interest rates and managing their impact on your wallet. A few basic facts, some comparison shopping, and a bit of common sense can make your auto payments a manageable subject.