How Interest Rates Are Determined

How Interest Rates Are Determined

When it comes down to buying a car everyone starts with looking with the type they want. After determining if a car, truck or minivan will fit your needs next comes the financing. Most people know what type of car they want and how much they’re willing to spend, but many do not take into consideration the interest rates. This can be a deterrent when it comes to finally signing the papers to that new vehicle.

With this in mind it is always best to walk into the dealership with brain full of knowledge. If you head into a dealer without a heads up it can make it easier to get sucked into a contract that doesn’t fit your needs. To get the best loan it is important to understand how lenders set their interest rates. There are many different places to get auto loans including dealerships, credit unions and even online. Finding the best one to fit your needs will take your due diligence.

There are two options of auto loans to choose from, secured and unsecured. Secured loans require some type of collateral to protect the lender from losing their investment. An unsecured loan does not have the obligation of collateral which will make the interest rates higher. Lenders make these interest rates higher to make sure the borrower does not default on the loan which will cost the lender in the long run.

Typically auto loan lenders will offer a loan for a 36, 48, 60 or even 72 month period depending on the vehicle and the monthly payment a borrower request. The interest rate for these loans are frequently between 6%-15% and in some cases can be higher, depending on the borrower. Some factors to determine the rate of interest consist of the duration of the loan along with the location to where to the vehicle was purchased.

Next is determining which type of rate you will choose. The two options are fixed or flexible. A fixed rate will remain constant throughout the loan with no fluctuation, while a flexible rate may change interest rate over the period of the loan. Flexible rates are based on the state of the market and have a cap on how high or low they may go. New versus old is always a question that arises when searching for an automobile and most cases both types of interest rates are available.

Taking the time to learn how the borrowing rates are determined can help save you money once you purchase your vehicle. Remember a down payment and the value will also affect your interest rate, the more put down the lower the interest.