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Ezra Bailey/Getty Images October 17, 2022 This article was generated using automation technology and thoroughly edited and fact-checked by an editor on our editorial staff. Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to take control of their finances by providing clear, well-researched information that breaks down otherwise complex topics into manageable bites. Bankrate logo The Bankrate promise
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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our loans reporters and editors focus on the points consumers care about most — the different types of lending options, the best rates, the best lenders, how to pay off debt and more — so you can feel confident when investing your money. Bankrate logo Editorial integrity
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Auto loan interest is the cost of borrowing money to purchase a car. The lender will look at your credit score, debt-to-income ratio and other factors to determine what interest rate it offers. To craft your budget, you should know your rate and how much goes toward your loan balance monthly. How does interest work on a car loan
Most lenders use for auto loans. Interest is calculated based on the amount you owe — the principal — each month. As you pay down your loan, you will spend less on interest and put more toward the principal. Interest is amortized, or paid down, evenly over the life of the loan. is less common and used on auto loans for borrowers with bad credit. The lender will calculate the total interest paid over the loan term. That total is added to the principal and split among your monthly payments. Because interest is not amortized evenly, you will pay more interest at the beginning of your loan. If you don’t plan on paying off your loan early, there is no difference between simple and precomputed interest. If you do pay off your loan early, you will save more money with a simple interest auto loan. How to calculate car loan interest payments
There are several ways to calculate your monthly auto loan interest payment. You can use an online loan payment or work directly with a lender. As long as you know the principal, and interest rate, you should be able to estimate your monthly payment — and the total interest you will pay. Use an auto loan calculator
Free, online auto loan calculators allow you to skip the pencil and paper and instantly determine your interest payment. These calculators allow you to find the monthly payment with different interest rates and loan terms. The will also provide a full amortization schedule so you can see the amount of interest you’re paying each month and the total interest paid over the life of the loan. Talk directly to a lender
You can also talk to a lender directly to . Working with a loan officer means you can get a customized idea of what your loan might look like, including potential interest rates based on your and how much you need to borrow. Factors that determine car loan interest rates
To get an idea of what interest rates are available to you, you can with several lenders. You should prequalify with at least three . Your auto loan rate is determined by factors including: Credit score. Lenders weigh your heavily when setting your rates. The lower your score, the higher your rate. According to Experian data, the average rate for someone with excellent credit buying a new car was . People with bad credit paid significantly more — with an average interest rate of 12.84 percent. Debt-to-income ratio. A can mean a better rate because lenders will consider you less at risk of defaulting. Loan term. Generally, longer loan terms . It also means a higher amount paid over the life of the loan but can carry lower monthly payments. Down payment. Making a large down payment means you are borrowing less and are less likely to on your loan. Car age. Typically, the older the car, the higher the rate. If you want to buy a car over 10 years old, you may struggle to find auto financing at a reasonable interest rate. Work and education experience. Some lenders now look at your job history and education when determining your interest rate, which means you could qualify for a decent rate without the best credit score. How to avoid paying too much interest
With the right strategy, you can pay less interest. Here are a few tips to help you save money. Shop around for the best deal
As with other types of loans, the overall cost of a car loan comes down to one major factor: the annual percentage rate. The APR includes both interest and lender fees, expressed as a percentage. Knowing what APR each lender will charge can help you find the car loan with the lowest overall cost. The interest rate listed on the main page is likely just the starting rate. You will likely need of 740 or higher and a stable income to get that low rate. to buy and finance in one place. But often, a dealership will not provide the best interest rate. Instead, get preapproved with a few first so you can negotiate like a cash buyer. You should also look at the lender’s requirements and restrictions. You can check these on the lender’s website or by using its quote form or application. You may also want to look at . Save up before you buy
If you have some cash of your own, you can use that as a down payment on your vehicle, which will lower your monthly payment and interest costs. A larger down payment can be more cost-effective than a long loan term because you will have a smaller principal and pay less interest over time. Experts often recommend you put at least 20 percent down, but that’s not a hard requirement in most cases. Because both new and used car prices have been increasing, the is over $6,000 in 2022, according to Edmunds. The bottom line
Interest is the primary cost of taking out a car loan. When you’re ready to buy, apply for preapproval with multiple lenders and use car loan calculators to determine how much you will pay. You can make an informed decision and avoid paying more interest than you should. SHARE: This article was generated using automation technology and thoroughly edited and fact-checked by an editor on our editorial staff. Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to take control of their finances by providing clear, well-researched information that breaks down otherwise complex topics into manageable bites. Related Articles