interest rates on car loans

Interest rates play a major role in car loans, especially in today’s world. More and more people are finding themselves in credit problems. The reason is simple, as the economy as been in a bit of a slump over the past years, people have relied to putting basic needs on credit cards. Many people have lost their jobs, and are unable to curb their spending to adjust to their new level of income. This results in them continuing to live a six figure lifestyle on a job that pays half that, if they are really lucky. A lot of people probably wonder how car loans work, and how interest rates are figured. They may also wonder what are some of the other factors that dictate who will receive a loan.

New Vs. Used
When people buy new cars, they will often be offered better interest rates. The reason new cars have better interest rates is because the manufacturer has their own bank and are trying to get as many of the new models on the market as quickly as possible. They could really care less how many used cars are sold each day, so they let dealerships find their own financing on them. Used cars are typically financed through credit banks or local lenders. They usually offer a nice kick back to the finance officers at the dealership for financing a certain amount of vehicles with the company. Dealerships are also able to mark-up interest rates a few percentage points to make extra commission. For example, if a dealership tells a customer that the best they can do is a 9% interest rate, the actual rate from the bank is probably around 6 or 7%, and the dealership gets the extra percentage points. People can see where a few extra points of interest could really add up with the price of cars today.

Good Credit Vs. Bad Credit
People do not have to demonstrate a perfect credit score to obtain the best interest rates, furthermore, it is hardly possible to have a perfect credit score. Credit scores are not simply determined based upon people paying their bills off each month. In fact, someone could make a huge income and have a ton of loans paid off on time and still not have a perfect credit rating. How is this possible? The banks look at the loan to income ratio, if the person has a history of taking out beyond that magic percentage, their rating will be less than perfect as they view this as a possible risk, despite their income. However, a good credit score, which is typically considered to be around the 620-650 range, will typically receive the best interest rates. They view these people as being a low risk to default on their payments, therefore they just want to make a little interest on the advancement of money. People with bad credit are a different story. The bank can issue loans with interest rates in the middle teens to upper 20′s, and beyond. The banks make their money off people with bad credit.

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