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Auto Loan Interest Calculation

Mark Cappel
UpdatedOct 12, 2007

How is interest figured on an auto loan? Is it based on your credit or the amount on the car or what?

How is interest figured on an auto loan? Isit based on your credit or the amount on the car or what?

Your credit history is probably the most important factor a lender will review when deciding what interest rate to offer you on an automobile purchase loan. According to Bankrate.com, the current average interest rate on auto loans is between 6% and 8%, and the average FICO credit score is around 680. If your credit score is better than average, you can expect to receive a lower-than-average interest rate, but if it is lower, you could pay significantly more. In fact, I have seen buyers with credit problems pay close to 15% or more to buy a new car.

While your credit history has the most influence on your interest rate, other factors also affect the amount you can expect to pay. For example, the rate on a used car will usually be a bit higher than that of a new car. Currently, the average rate on a used car loan is about a half of a percent higher than a comparable length loan on a new vehicle.

This does not mean that buying a new car is a better deal than buying a used car. On average, a new vehicle will lose 60% to 70% of its value in the first two years after purchase, so you may be better off buying a used car even though you will pay more in interest. Also, a longer loan will have a slightly higher rate than shorter loans; the rate on a 72 month loan is about a tenth of percent higher than a 36 month loan. The purchase price of the vehicle is not usually a major factor in calculating the interest rate. However, some car companies offer reduced interest rates on certain models, so the type of car you buy may influence your rate.

Bills.com offers a wealth of information and advice about buying a vehicle at http://www.bills.com/autoloans/

Before you buy a vehicle, make sure that you know your budget, what the car should cost, your credit score, and the interest rate you should expect to pay. If you go to the negotiating table as an educated consumer, you may be able to leverage a deal that could save you thousands of dollars over the life of your loan.

I also offer a free budget guidebook, that you can download here:

http://www.bills.com/guide/

I hope this helped you Find, Learn, and Save!

Best,

Bill

www.bills.com