How to Understand Car Interest Rates

In many places around the country, a car is a necessity. But even a no-frills new car costs thousands of dollars, making a car purchase without financing generally impossible. Even the cost of a used car is often more than you can afford out-of-pocket, so chances are that your next car purchase will require some type of financing. When financing a new or used car, it is important to understand interest rates charged by banks, car dealers and other financing agencies.

Instructions

1

Review any financing offers that apply to the cars you are considering. Car manufacturers often give customers a choice between a low-financing rate and a cash rebate. Calculate the amount of interest you could save by going with the lower-financing rate, then compare it to the amount of the cash rebate. For instance, if the going rate for car loans is 6 percent, a zero percent financing offer on a $30,000 car would save you roughly $1,800 over the life of the loan. If the rebate is more than that amount, it would be better to take the rebate and use it to pay the interest on the loan.

2

Pick up and review a rate sheet the next time you go into the bank. Rate sheets typically list the interest rates on various loans, including loans for new and used vehicles. Use your calculator or a spreadsheet to determine your monthly payment and the amount of total interest you will be paying. There are a number of car payment calculators on the Internet to make the process easier.

3

Note the variance in interest rates between new cars and used cars. Banks typically charge at least 1 percent to 2 percent more in interest on used cars than on new ones. While this difference may not be the determining factor in your purchase decision, it is something to keep in mind.

4

Check the interest rates on car loans at several financial institutions, including banks and credit unions. Credit unions often provide better rates on loans, since they are owned by their members and not shareholders.

5

Check government resources like the Federal Trade Commission's website for tips and warnings about car loans and car interest rates. It is important to be on the lookout for scams and pitfalls when shopping for a car loan.

6

Read the fine print of the car loan application carefully. Some car loans require consumers to come up with a large down payment in order to get the low interest rate. Others restrict those super-low interest rates to those with stellar credit scores, according to the New York City Department of Consumer Affairs Office of Financial Empowerment.

7

Ask the dealer if the special car loan rate is available on all models, or if it is restricted to one or two vehicles. Sometimes a car dealer will advertise a low interest rate to help clear inventory of overstocked vehicles.

8

Watch out for balloon payments on car loans. Some car loans have low monthly payments, but require a large payment at the end of the loan. In some cases this balloon payment can be thousands of dollars.