3 Car Loan Payment Factors: What Determines Car Loan Interest Rates?
By admin | August 27, 2020 | Budget, Finance

When you’re buying a new car on loan, one of the most important considerations you need to be thinking about comes in the form of your loan’s interest rates. While you may be getting a great deal with the car, if you’re paying a stupid and ridiculous amount of interest, it’s going to be a very expensive purchase over the long term.

While paying some kind of interest is inevitable, knowing what factors define your interest rate can help you find an interest rate that works for your budget, ultimately helping you save money, find the best deal, and make the most of your car loan. In today’s guide, we’re going to explore the three main factors that will define your rate.

  1. Your Loan Amount

Of course, first things first. How much money you’re actually borrowing will dramatically affect how much your interest rate is. For example, if you’re buying a $15,000 car with no trading for your old car and no downpayment, and you take out a 5% five-year loan, the total interest you pay will be around $3752. You can work this out using an online calculator.

On the other hand, if you traded in your old car for $7,000, therefore taking out the same loan, by with a total of $8,000, the total interest you’ll pay throughout your loan term will be around $2000. Overall, the less money you take out, the less interest you’ll need to pay. Loan providers tend to reflect this by offering lower loan rates for lower amounts in this same way

2.Your Income and Your Debts

There is a very close link between how much income you make and how much debt you have as to what kind of interest rate you’ll be offered. If you have not a lot of debt, a high credit rating, and you’ve proven you’re able to pay back your debts properly, you’ll be given fair car loan rates.

Alternatively, if you’ve been struggling with debt and have a low credit rating, this means you can end up paying more because you’ll have a higher interest rate since the providers will see you as a higher risk of getting the money back. The better you can get your credit rating, the better your interest rate will be.

3. Your Loan Term

As we discussed above, the duration of your loan, known as the long term, will affect your interest rate. Short-term loans, especially with cars and large purchases with a duration between one and three years will have a much smaller interest rate than those loans that are six years long. The quicker you’re able to pay off your loans, the lower your overall interest rate will be and the less you’ll need to pay.


As you can see, there are several factors you’ll need to think about when taking out a car loan and choosing an interest rate to suit you. This is so important to think about because choosing when’s the best time to take out a loan will determine your rates of charge and how affordable your loan is going to be. It’s always worth thinking about so you know whether you’re getting the best deal.

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3 Car Loan Payment Factors: What Determines Car Loan Interest Rates?