How Interest Rates Decided Auto Loans

Posted at Fri, Oct 23, 2020 1:36 PM

Interest rates, how are they determined? There are four main deciding factors when it comes to the interest rate you receive from the bank when you buy a new car. These factors are your credit score and the history behind it, the length of the term for your loan, the amount of money down and overall equity, and the year for the model of the car you’ll be purchasing. In this article we’ll be looking at each one individually, and connect them all together in order to help prepare you, a hopeful member of the North End Family with what matters most when deciding to purchase a new vehicle.

First off, your credit score and history. As you know, your credit score is a number attached to your financial strength, used by banks and lending institutions to make a judgement on how they should help you when working with them. This number is decided partly on how many lines of credit you have (student loans, automotive loans, mortgage, credit cards, etc.), available credit, and how long you’ve been building your credit. There are multiple different systems that are used to determine this number, and it will vary based on the system used for what you’re trying to accomplish, whether it be securing a mortgage, financing a vehicle, or opening a credit card. Have you been consistent with paying your previous monthly car bill? Have you overextended a line of credit, known as debt utilization? Have you missed multiple payments recently? All of these things will impact how a bank moves forward when you initially apply for a loan. Overall, both the numerical score and the history behind it are deciding factors, whereas different banks look at different metrics within them, the previously mentioned points are commonly used.

Now, the length of your term. As discussed in our previous article on the mainstay term lengths, those being 48, 60, and 72 month terms, each term length provides you with different advantages, and depending on your situation and what you’re trying to accomplish, any can benefit you. That being said, a shorter term will typically see a lower interest rate attached, while a longer term will typically see a higher interest rate attached. This is what occurs most frequently, however specific institutions may offer more competitive rates at longer or shorter term lengths in order to stand out amongst the crowd. Here at North End Motors, we look for, and work with, those banks that are aggressive on earning your business, and we typically see competitive rates at all term lengths.

We’ve come to the amount of money down, more than that, the amount of equity you’ll be putting into your vehicle. What’s equity? Great question, for the uninitiated, such as first time car buyers who may be reading this, equity for our purposes is the amount of money you borrow versus the value of the vehicle. So, say you put $5000 down and have a trade-in worth $3000, you now have $8000 equity in the vehicle. That’s a good amount of equity to have in a vehicle! What to watch out for is negative equity, let’s say you’re still putting down that $5000 dollars, the trade is still worth $3000, but you owe $9000 on your current vehicle, this would leave you with -$1000 going into the loan, and would lead to a higher payment. However, if you were able to put another $1000 or $2000, you’d end up neutral or having some positive equity to start with.

We’ve reached the last piece of the puzzle, thank you for tagging along this far. The year of the vehicle is, you guessed it, the production year of the vehicle you’re purchasing. A newer model year will usually see a lower interest rate attached to it from banks as it’s viewed as a less risky investment, and as we all know, banks like money (which may be an understatement).

As you’ve seen, each part of the interest rate puzzle, your credit score and history, your term length, your amount of equity, and the year of your next vehicle, all come together to give you the interest rate you’ll see when you sit down with our finance manager. On their own, they each represent a single piece that’s taken into consideration, together they’ll be a big influence on the rate you receive. Here at North End Motors, we’re committed to equitable and transparent practices to empower you, our customer, to make the best decision you can financially, for your lifestyle, and for your family, whatever it may look like. We look forward to welcoming you to the North End Family.


The article above is a summary of information gathered from research on the criteria utilized by other financial institutions to determine interests applied to automotive loans, this information is not meant to replace research undertaken by the consumer but meant to act as a supplement in their search to establish a beneficial financial decision. North End Motors Inc. is not to be held liable for misinterpretation or misattribution of the above article as it relates to the decision to engage in any financial undertaking

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