When you need a car but do not have the money saved to buy one outright, you may turn to a car loan to finance your purchase. In 2020 more than $150 billion in new car loans originated, according to Statista. Individual car loans continue to increase to match the growing cost of new and used cars.
An auto loan interest rate represents the additional money you pay on top of the cost of the vehicle. In 2021 new car auto loan rates averaged around 4%, according to Experian.
Car loan rates depend on your financial standing, other parts of the loan like the length of the loan, and what institution provides the loan. To get the best available car loan, you need to shop around for multiple loan offers and decide which has the best blend of loan rate, term, and amount of money loaned to get you in a vehicle that meets your budget and personal needs.
Parts of a Car Loan
The right loan for you covers the cost of your vehicle purchase and has an affordable monthly payment.
The loan amount is how much money the lender gives you for your car purchase. Most loans cover the car without any add-ons. If you have good credit, you may be able to roll taxes, fees, and add-ons into your car loan, but remember you will be financing these costs in addition to the price of the car.
New cars’ high costs have resulted in higher prices for used vehicles. The average used car loan was nearly $26,000 in quarter 3 of 2021. Used car loans also have higher interest rates because lenders consider used cars less reliable. The average used car loan rate was nearly 8% compared to the 4% average for new vehicles.
Auto loan interest rate
Also known as the annual percentage rate (APR), auto loan interest rates determine how much more than the car’s price you pay over the life of your loan. Loan interest rates are determined primarily by your credit score, income, and the federal reserve’s interest rates.
Your credit score is the most important determinant for your auto loan’s interest rate. While different lenders use different calculations to make their interest rate, they all use your credit score. Typically, the higher your credit score, the lower the interest rate.
Poor credit scores get an average auto loan interest rate of about 13%. Excellent credit scores garner loan applicants an average car loan rate of 2.5%. Lenders give lower interest rates to applicants with good credit because they are considered lower risk.
The APR combines with the size of the loan and loan term to calculate your monthly payments. Auto loan calculators show your monthly payments and how much interest you pay each month based on those inputs.
The loan length is the number of months you make your car payment. Shorter loan terms have higher monthly payments but lower overall interest payments.
Long loan terms reduce the monthly cost of your car but result in higher overall loan repayment. If you can afford the high monthly payments, it makes long-term financial sense to opt for a shorter loan term because you pay less for your vehicle overall.
The average loan length is 69 months for new cars and 66 months for used vehicles. At T&I Credit Union, we offer loan terms of 60, 72, and 84 months for new vehicles and 60 months for used cars. Our loan rates are also lower than the national average.
Shopping for a Car Loan
Each lending institution has its pros and cons that should be weighed against one another. Careful consideration of each lender’s offer gives you the best chance to find a great car loan deal.
Dealerships are the most common lender for new car loans. The ease of arriving at a dealership and leaving with a new car makes dealership loans attractive. Plus, they sometimes offer low-interest rate loans to buyers with excellent credit; however, dealerships often place such restrictive credit limits on these deals that they serve as a marketing ploy more than a legitimate offer.
Dealerships also try to accommodate borrowers with bad credit by offering high-interest rate loans. They can do this without as much risk as a bank or credit union because their profits come from the car sale more than the loan repayment.
You need to scrutinize these loan offers carefully, as dealerships score poorly in loan transparency, according to Wallethub. The dealership may advertise low monthly payments but not mention an extended loan term or interest rates above the national average.
Get a pre-approval for a loan from a bank or credit union to ensure the dealership offers you a fair loan. Pre-approval gives you negotiating power and a loan to compare the dealership’s offer.
Car financing through a bank is attractive for a couple of reasons. First, if you already do business with a bank, they may offer a lower car loan rate, and it is convenient to keep all your finances in one place. Banks also work with you to create a loan that you can pay off, which helps you stay within your means when purchasing your new car.
The downside of bank loans is that they have higher interest rates than the national average and significantly higher rates than credit union loans. Banks charge higher loan rates than credit unions because they are for-profit businesses.
The advantages of credit unions come from their community-level approach to financing. Credit unions, like T&I Credit Union, can offer interest rates below the national average because they are not-for-profit institutions. Members of credit unions are partial owners rather than just customers like they are at banks. Consequently, credit unions care about the financial health of their members.
A credit union’s personal touch results in an understanding approach to car loans and financing in general. At T&I Credit Union, for instance, we offer financial counseling services to help our members improve their credit scores and earn better auto loan rates. T&I’s Money Manager financial tracker helps our members track their credit cards and set measurable financial goals.
Only credit union members have access to its low-rate loans and services. If there is a local T&I credit union near you, consider becoming a member because our community-minded services get the best financial outcomes for our members.
Combine Great Deals and a Personal Touch at T&I Credit Union
At T&I Credit Union, we want to get you in the car you love for a price you can afford. Fill out our online car loan application to get a pre-approval in as little as 20 minutes. Contact us with questions about our auto and personal loan offerings, and read our blogs to learn more about the benefits of becoming a member.