« Back to News & Blog

Factors That Determine Vehicle Interest Rates

a man surprises a woman with a new vehicle

Shopping for a car can be a significant life event. If you’re taking out a car loan, you’ll likely be paying on your vehicle at least for the next few years. That means you’ll want to get the best deal you can for your interest rate.

To help you understand what determines the interest rate you get, we’ve outlined some of the critical factors. Some of these factors are in your control, and others are not. Knowledge is power, though, and knowing what you can control can help you get the best deal.

APR vs. Interest Rate

Before we start, we need to discuss a critical distinction between APR and interest rate. You may know that you want to pay as little interest as possible, so the lowest interest rate is best.

But when you take out a car loan, you’re not just paying interest. You’ll also incur some fees, depending on the terms of your particular loan. APR stands for Annual Percentage Rate, and it encompasses the total cost of borrowing money over a year.

This distinction makes it easy to compare car loans because you don’t have to worry about comparing the fees on top of interest rates. Just look for the APR and use that for comparison.
Now that we’ve gotten that out of the way, we’ll get back to the factors determining vehicle interest rates.

1. Fixed vs. Variable APR

One factor that will affect your APR is whether it’s fixed or variable. Fixed APR remains the same for the life of the loan, while variable interest rates change with the U.S. prime interest rate. Fixed APR car loans are the most common.

On the other hand, variable rate loans may have slightly lower APR during the initial period. However, it can fluctuate up and down, potentially costing you more.

2. Current National Interest Rates

Both fixed and variable rate loans are tied in some way to the U.S. prime interest rate. The national interest rate depends a lot on the state of the economy, and you cannot necessarily control that. However, watching for low interest rates and subscribing to a service to get alerts when interest rates fall can help you nab a good deal.

3. Your Credit Score

Your credit score dictates a lot about the vehicle interest rate you can access. If you have excellent credit, you could save as much as 10% on APR compared to someone with poor credit. Because of this, you should monitor your credit score and discuss your options with a loan officer.

If your credit is less than ideal, it can pay to spend a year or so building up your credit before taking out a car loan. Waiting like this can save you significantly.

4. Your Income and Occupation

In addition to your credit score, lenders will often consider your income and your occupation. Specifically, they’ll take into account how stable your income is and how much you make.

5. Used vs. New Cars

Believe it or not, whether you are getting a car loan for a new or used car can affect the interest rate you can get. Used vehicles will incur a slightly higher APR, as these are seen as somewhat more of a risk. The likelihood of a used car breaking down and being totaled is higher than that of a new car.

6. Your Down Payment

If you put a small down payment down, lenders see this as a risk and may increase the APR you are approved for. The higher the down payment, the less you owe and can default on, meaning that lenders are often willing to approve you for a loan with a lower APR.

7. Car Promotions

Some car dealerships offer excellent deals on APR at certain times of the year – like 0% APR. However, keep in mind that these deals are usually reserved for those with the absolute best credit and may not apply to the car you want. These promotions often also come with high monthly payments and a short term.

8. Your Term Length

Typically, the longer the term, the higher the interest rate. The longer your car loan is, the more the car value will depreciate (go down).

This possibility means that the lender might end up in a situation where you owe more on the car than it’s worth. This is risky for a lender in the case that you default. Because of this, APR usually increases with term length.

9. Type of Financial Institution

One of the key determinants in how much interest you’ll pay for your vehicle loan is where you get it. Car loans are typically available at the dealership, banks, credit unions, and online. Of all these places, credit unions often offer the best interest rates.

Credit unions are member-owned and often offer lower interest rates than banks. Many are willing to work with their members, despite their credit, and offer very competitive interest rates for car loans.

Ready to Shop for the Best Vehicle Interest Rates?

When you’re ready to start looking for a car loan, one of the best ways to save money is by shopping around and considering a wide array of options. Start with Jeanne D’Arc Credit Union today and explore our low, competitive interest rates.

See Our Current Rates