Comparing Auto Loans For The Best Rate

If there's one thing that continually mystifies auto loan searchers, it's the interest rate associated with a particular loan offer. While most have a tangential idea that a lower interest rate is better, what exactly qualifies as "good," "bad," or "in-between"?

On top of that, how do you compare auto loan rates and determine which one might be best for your situation? Thankfully, there are plenty of online tools, like the Auto.Loan rate comparisons listed on their site, among others. Still, you have to make sense of it all.

Today, we're going to take a look at a few different rates for example's sake, break down what they mean in real terms, and provide some helpful tips on finding the best rates for your next auto loan. Let's begin.

The Real Difference In Rates

First an explainer. The interest rate, when talking about an auto loan, is the amount that your lender charges you for borrowing the money you'll use to pay for the car. This is expressed as an annual percentage (known as APR, annual percentage rate).

Think of it as compensation for the use of the lender's money. After all, they could have invested those funds or used them on something else. Generally speaking, if you're a "low risk" borrower, a lender will charge you less interest (good). If you're "high risk," the lender will charge more interest (not so good).

Here's a comparison. Let's say you want to buy a $20,000 vehicle, and pay the loan back over a five year period (60 months). If you can find a loan with a lower interest rate, say 4.00%, you'll pay back the price of the loan plus the interest for a monthly payment of $368. Over the course of the five years, you'll pay a total of $22,080. Not bad.

Now, let's compare a higher interest rate on the same $20,000 loan, 10.00%. Your monthly payment would instead be $425, and over the course of the loan period, you'll pay a total of $25,500. That's a difference of $3,420, rather significant, no?

The rule of thumb is that the higher the interest rate and the longer the term of the loan, the more you'll be paying overall. Even though the monthly payments on a longer-term loan may be lower, the increased period will equate to more money spent on your part.

Hence, looking for lower interest rates and, if possible, paying back the loan in a shorter period are the best ways to save in the long run. Now the question is, how to track down the best rates?

Time To Shop Around

We briefly mentioned one of the first steps you should take: compare different lenders for the best rates. When you have multiple options laid out in front of you, it's much easier to identify which is giving you the best deal.

To make sure that you can secure the best of the best when it comes to auto loans, you've got to do a little preparation on your part. It starts with having a good understanding of your credit score.

Lower credit scores will make it more difficult to get the best terms on a loan, while higher credit scores will make it easier. You can check your credit score through various means, and some of them come at no charge to you if you know where to look.

Try to secure a lender before you pick out a vehicle and go to make your purchase, as a bank or credit union will generally offer you better terms than going straight to a dealership's financing.

Finally, make sure you have the terms locked-in before you buy to ensure you won't be hit with any tricky surprises down the road. The more preparation you do beforehand, the fewer headaches you'll have to deal with later in the loan process.