If you’re about to apply for car finance, something you must fully understand is how car loan interest rates work as it will affect your long-term finances. To get you informed before sending your loan application, here is a comprehensive guide about car loan interest rates.
What is the car loan interest rate?
A car loan interest is as simple as a home loan interest is. Generally, the interest rate is an annual percentage of the principal amount loaned. This means you have to pay the initial amount of money the bank lent you plus interest repayments mostly done every month.
When you decide on a car loan to get a car, your bank buys the car for you and permits you to pay the amount back over an agreed period. The lending bank gives you the favour of using its money, but in return, you will settle the amount you borrowed from the lending bank plus interest paid monthly until it is completely compensated.
Interest rates can be decided by either employing a simple interest or through precomputed interest. The majority of car loans employ simple interest, which is front-loaded and undergoes amortisation. Front-loaded means that your monthly payment covers larger payment to the interest at the start of the loan term while payment at the close end of the loan term augments the principal balance. Paying more than the minimum will also reduce both your loan balance and the interest you are indebted to.
How is it calculated?
Precomputed interest means an advanced calculation of the interest, based on the amount you borrow. Your monthly payment depends on the computed interest plus the borrowed amount and divided by the number of months your payment will be made. With this type of interest, your payments don’t individually employ the principal amount and interest. Even if you pay an excess of the minimum due, make additional payments, or settle your loan balance ahead of time, it won’t be as cost-effective as simple interest.
You can always do the basic math to compute how much of your monthly payment goes to the principal and the interest. If you want to skip the hassle of formulas, you can just plug and chug the numbers in our easy car loan repayment calculator and easily compare the costs of a car loan.
What’s a good car loan interest rate?
Interest rates vary depending on a person’s credit score, credit history, loan term preference, down payment, and choice of vehicle. A high credit score and good credit history as proof to lenders that you pay your bills ahead or on time will give you a high chance of getting a lower interest rate and the other way around.
Here’s a few tips on how to easily Maintain a Good Credit History
Depending on these factors, you can avail of a car loan interest rate ranging from 3 percent to almost 14 percent. It is good to note however that the majority of three-year car loan interest is approximately 3 to 4.5 percent provided that your credit score is above-average. In summary, the best way to get a car loan with a good interest rate is to shop around, get pre-approved from lenders, compare their offers and choose the most suited car deal for you.
What is 0% interest?
Lately, popular car manufacturers have been offering deals of 0% interest car loans. Sounds terrific but is it a great deal? Well, it is not! This is only a marketing strategy that dealers do to allure buyers inside their showroom and for manufacturers to sell more of their vehicles.
In short, car loans with 0% interest are too good to be true. Aside from the fact that you need to have an immaculate credit, car dealers offering 0% interest on financing will certainly find a way to cope up with the difference in some way. Here are some of the tricks they may use:
- Offer an inflated and non-negotiable vehicle price
- Less flexible loan structure
- Balloon repayments
- Large deposits
- Monthly maintenance fees
- Shorter loan terms
How does my car loan term length affect my interest charge?
In simple terms, the longer borrowers are indebted with money to lenders, the more interest the borrowers have to wage. In this sense, you might end up owing more than the actual worth of your loaned car if you opt for a longer-term loan rather than a shorter one.
However, it is noteworthy that it is still feasible to pay less regardless of a longer car loan duration, provided that the longer loan duration is adequately lower in interest rate. Therefore, a borrower must understand the relationship between interest rates and the duration of the loan.
How can I reduce my interest charges on my loan?
Interest charges greatly increase the total amount you are going to repay for your car loan. Nonetheless, there are several ways on how you may be able to cut down the interest rates of your car loan and save money.
Settle an early repayment
Since your monthly interest charge is based on the current payable amount, reducing your interest charges is possible by paying on an unscheduled basis. This payment lowers down your loan balance significantly and speeds up the settlement of your loan.
Choose a shorter loan term
As long-term car loans increase interest rates, you better choose a shorter one if at all possible. Doing so will increase your monthly payments but eventually, minimise the total amount of loan interest repayments you will make. Just make sure you have the means to afford it.
Higher down payment
Down payments reduce the principal amount of your car loan along with your monthly payables. This is how making higher down payments can reduce your interest rate and keep some money in the long run. Similarly, zero or low down payment may drive lenders to charge you higher rates.
Taxes are inevitable in purchases and will influence your car loan. The good thing is, car loan taxes are straightforward. You are taxed based on the cost of the car you loaned for and will be added directly to the amount you borrowed.
Moreover, individual tax rates will not influence the interest rate of your loaned amount. Meaning, your taxes will not boost your interest rate, but rather increase your loan balance which increases your interest charges as well.
Annual Percentage Rates (APR)
APR in car loans is the annual rate of a finance charge you pay inclusive of interest charges, origination fees, transaction fees, and all additional fees included to avail your loan. The finance charge is composed of interest charges as well as prepaid finance charges. Prepaid finance charges are simply the various charges and loan fees added in your total loan amount. Though regarded as prepaid, the finance charges or fees in your total loanable amount still require payment for your car loan, characterising the prepaid charges like camouflaged interest charges.
When shopping around for car loans, you must compare both APR and interest rates as some lenders can offer low-interest rates but attach balloon payments on prepaid finance charges.
Get a Pre-Approved Car Loan with Aussie
If you’re looking for a car loan in Sydney, Melbourne, or Brisbane, Aussie Car Loans can help you get a vehicle finance with competitive low rates. Whether you’re buying new or used car, we can provide a variety of loan products for you with flexible loan terms through a simple loan application online.