A Guide to Understanding Car Loan Rates
Don’t panic! Many people get confused about car loan rates, which is why it’s always great to seek expert advice if you’re in any doubt.
Interest on car finance means the same as car loan rates – but it’s important to know that this is different to a ‘fee’.
Rate or interest rate
Interest rates are the pricing structure for the loan, charged as a percentage of the amount you borrow. The interest charged on your loan is calculated and included in your repayment amounts.
Fees are a type of payment, either a one-off or regular payment to a lender for a service, such as establishing the loan, an early termination, or account management. Fees can often raise the total cost of repayment, sometimes unexpectedly.
Compound vs simple interest
It gets slightly more complicated when we talk about different types of interest. Don’t worry though—they’re pretty easy to understand once you get the basics.
Simple interest is based on the principal amount of a loan or deposit.
Compound interest is based on the principal amount and the interest that accumulates on it.
For instance, if you had a loan of $10,000 with simple interest charged at 15% over three years, the total amount of interest payable by the borrower would be $1,500.
However, the same loan with interest charged on a compound basis would be a total of $1,576. With compound interest, the interest amount would not be the same for all three years as it takes accumulated interest from previous periods into account.
Car loan terms
When thinking about interest on car finance, it’s important to consider the term of your car loan. The term is the amount of time you have to pay off your car loan.
Generally speaking, longer terms have lower car loan rates, however, there are traps you can easily fall into.
Remember that although your monthly payments will be lower, you will be paying the interest for a longer period of time, so you could end up paying more overall. Use a simple loan calculator to get an idea of how your loan term impacts the total amount of interest you pay.
How much should you borrow on your car loan?
This is something that you should ask yourself—how much can you afford to put in as a down payment for the car, and how much will you need to borrow?
Budget properly and you won’t risk agreeing to a car loan that you struggle to repay. It’s important to always make your repayments on time and in full. If you miss or default on your repayments, you could incur fees and damage your credit history which will affect your borrowing in the future.
Generally, the larger the amount of money that you borrow, the lower the car loan rate. In fact, you can see interest rates drop by as much as 10 per cent when you borrow $10,000 instead of $2,000 in some cases.
Be careful because the final amount of interest on car finance that you’ll end up paying (on a larger amount) could actually be more than with a smaller amount. It’s always advisable to put as large a deposit down as you can—without putting financial pressure on yourself—so that you can keep your car loan to a minimum.
A good rule to follow is to borrow what you need—no more, no less.
Understanding car loan rates
Car loan rates aren’t always clear cut. It’s really useful to get to grips with the basics so that you can make informed decisions about the best interest on car finance for you. If you are unsure of anything, it’s always essential to speak to an expert.At Positive Lending Solutions we have over 35 years of experience dealing with car loans, and we’ll be able to speak to you to explain the best car loan rates for you on the market today.