Auto Loan Rates Explained
What is Compound Interest?
Auto loan rates are basically the rental price of borrowing the money you need to buy a car. The interest rate on any loan, including auto loans, is expressed as an annual percentage rate but how high or how low this rate is depends on a number of variables.
One of the biggest factors that determine auto loan rates is the borrower’s credit rating. Credit history is analyzed and used to create a credit score which indicates the ability of the borrower to pay back the loan. The lower the score the more risk there is for the lender which means higher interest rates for that borrower. It’s always a good idea to know your credit rating before you go shopping for auto loans, particularly if you suspect you may have bead credit.
There are two types of interest rate: simple interest rates and compound interest rates. Simple interest rate is calculated only on the portion of the loan amount that is still outstanding. Compound interest rates are higher than simple rates because in these interest is paid on interest as well as the amount borrowed.
Compound rates are calculated on the loan amount and the interest accumulated up to that point.
It seems every finance company, dealership and bank are advertising low auto loan rates but what a lot of people don’t realize is that these are reserved for a select few who have above average credit scores. This is especially true of loans boasting zero percent interest rates and only 20 percent of buyers actually qualify for these.
One key aspect of low rate auto loans is that the monthly payments tend to be much higher than loans with higher interest rates. Loan terms are often 12, 24 or 36 months which can result in fairly steep monthly payments. A common requirement of low rate auto loans is that the borrower forfeits the cash rebate in order to get the lower rates but this can mean that the loan would end up costing up to 7 percent more than a higher rate loan with rebates.
It would be wise to do some calculations before you grab finance offering low auto loan rates to make sure that you are not being seduced into a loan that may not benefit you or suit your financial situation.