Americans love their cars. According to the Kelley Blue Book, Americans own their cars an average of four to five years, as of publication, and couples with multiple drivers or vehicles are likely to buy new cars even more frequently. Buying new cars every few years is costly, so finding ways to reduce the cost of car ownership is essential for couples looking to stretch their budgets. Understanding the factors that influence auto loan interest rates provides insight into getting better rates and reducing the overall cost of car ownership.
Your credit score is a number based on your debt payment history lenders use to assess whether to approve a loan. Your credit score is the single most important factor in determining loan rates that you can influence yourself. According to the Fair Isaac Corporation, a borrower with a credit score in range of 720 to 850 could get an interest rate of 3.6 percent on an a 36 month auto loan, as of publication, while those credit scores below 660 faced interest rates in excess of 10 percent.
When you take out an auto loan, you can choose a how quickly out pay off the debt. Auto loans usually last 36 months, 48 months or 60 months. Choosing to pay off a loan over a longer period of time can result in facing higher interest rates on a loan. Auto loan data provided by the Fair Isaac Corporation show that loan rates for those with high credit scores were 3.61 percent for 36-month loans, 3.65 for 48-month loans and 3.7 percent for 60-month loans, as of publication.
Monetary policy describes actions that the federal government takes to control the money supply, interest rate and inflation in the economy. The U.S. Federal Reserve sets an interest rate called the "federal funds rate" which determines the interest rates banks charge one another for loans of reserves. Banks tend to base the interest rates they charge on consumer loans on the federal funds rate, so the Fed’s decisions can affect interest rates on auto loans, mortgages on other debts.
Inflation is the rate at which prices are increasing in an economy. Lenders charge interest on loans, in part, to counteract inflation. For example, if prices increase at 3 percent a year, banks can charge 4 percent annual interest on loans to ensure they have more money in the future. Lenders are willing to set interest rates lower when inflation is low, while high inflation can lead to higher interest rates.
- Fair Isaac Corporation: How Much Will Your FICO Score Save You On Your Next Car?
- Federal Reserve Bank of San Francisco: Monetary Policy
- LendingTree: How to Save Money on Auto Loans
- Bankrate.com: How Interest Rates are Determined
- Kelley Blue Book: Average Length of U.S. Vehicle Ownership Hit an All-Time High
- How Long Is the Average Car Loan?
- Why Does the Volatility of Interest Rates Affect Risk?
- Characteristics of Long Term Debt
- Prime Rate vs. Mortgage Rate
- Difference Between Subprime & Prime Loans
- What Causes a Decrease in Money Market Rates?
- Car Refinancing for People with Fair Credit
- Types of Loans Offered by Banks