If you are looking to buy a new car, there’s a good chance you will need to apply for financing. The good news is, car loan APRs are lower now than ever, making it the perfect time to buy a car or refinance your car loan.
So, how do you know if you are getting a good deal or not?
Today we are talking about how car loan interest is calculated and what is considered a good rate for a car loan.
How does interest on a car loan work?
Before we get into the specifics of today’s car loan rates, let’s talk about how car loans work and how interest gets calculated and applied. Car loans are secured loans, which means that if you default on payment, the car itself will be used as collateral.
The primary factors of a car loan are the following:
- The principal
- The interest rate
- The length of repayment
The principal that you are borrowing is the cost of the car, plus any fees and taxes, minus your down payment.
Principal = Cost of Car + Fees + Taxes - Down Payment
The interest that is charged is essentially the price of borrowing money for your loan. The car loan APR that you are offered is based on:
- The market rates
- Your income
- Your credit score
- The repayment terms
The interest that you are responsible for over your repayment is calculated using the following formula:
Interest Cost= Principal x Car Loan Rate x Length of Loan Term
The interest due is added to the principal due and divided up over your repayment period. While your monthly payments will be the same every month, the money will be divided up between principal payments and interest payments according to an amortization schedule.
How much should you put down for a car payment?
When it comes to your car loan, you may be wondering “How does increasing the size of your down payment impact your auto loan?”
The more money that you put down up front, the lower your monthly car payments will be. In general, it is recommended that you put 20% of the total cost down as an upfront payment. This will offset depreciation and help ensure that you never owe more on the car than the car is worth. Let’s look at an example to see how much a down payment can save you.
You would like to buy a new car with a purchase price of $30,000 and you choose to not make a down payment. You have an APR of 6% and a sales tax of 6%, and you have decided on a 48 month payment period.
Total Loan= Purchase Price + Sales Tax
Total Loan= $30,000 + .06 x $30,000
Total Loan= $32,330
Over the life of the loan, you will pay $4,048 in interest on this balance of $31,800, ultimately paying a total of $35,848 on your $30,000 car. Your monthly payments will be about $747 per month.
Now let’s look at what happens when you put a 20% down payment on a car.
Total Loan = Purchase Price + Sales Tax - Down Payment
Total Loan = $30,000+ .06 x $30,000 - $6,000
Total Loan= $25,800
Over the life of the loan, you will pay $3,284 in interest on this balance of $25,800, ultimately paying a total of $29,084. Your monthly payments will be about $606 per month.
A down payment of 20% will save you over $700 in interest and reduce your monthly payments by over $100.
On top of saving you money and lowering your monthly payments, there are other benefits to making a down payment on your new car:
- It might make the approval process easier
- It might qualify you for special incentives
- It can offset depreciation
As you can see, making a down payment on a car can make a big difference.
What is a good rate for a car loan?
So what’s considered a good rate for a car loan? For that answer, let’s look at the latest State of the Auto Finance Market Report from Experian. Every quarter Experian does a deep dive into the auto industry’s consumer trends. This latest report from Quarter 4 of 2021 gives us the following car loan APR averages based on credit score.
- Exceptional (Super Prime, 800-850): 2.47%
- Very good (Prime, 740-799): 3.51%
- Good (Near Prime, 670-739): 6.07%
- Fair (Subprime, 580-669): 9.41%
- Very poor (Deep Subprime, 300-579): 12.53%
The better your credit score is, the better car loan APR you will be offered. That is why it is so important to work on raising your credit score before you apply for financing, or before you apply to refinance your car loan.
The market rates play a large part in the car loan APR that you will be offered, and we have been seeing incredibly low interest rates over the past few years. The Fed has announced that rates will be increasing as the year goes on, so now is the perfect time to refinance your car loan.
When is a good time to refinance a car loan?
The average car loans above should give you a sense of whether or not you can find a lower car loan APR when you refinance. But if any of the following apply to you, now is probably a great time to refinance your car loan.
- You got talked into dealer financing with your original loan
- Your credit score has improved
- The market rates have dropped since you initially applied (And they probably have!)
- You need some extra breathing room in your monthly budget
- You want to add or remove a co-borrower
On the other hand, if any of the following apply to you it might not be the best time to refinance your car loan.
- If your existing loan has heavy prepayment penalties
- If you need a high credit score for another application
- If your existing loan is less than six months old
- If your existing loan has less than a year left
- If your credit score has decreased
Today’s car loan rates are lower than ever, making it the perfect time to refinance your car loan.
With rates this low, now is the perfect time to refinance your car loan with Auto Approve! Just fill out some basic information and we can help you start comparing rates (and saving money) today. And rest assured that we never mark up your rates; we are passionate about passing the savings right on to you. So don’t wait any longer – get a free quote from Auto Approve today!