When you buy a car with a loan, you not only pay back the amount borrowed but you also pay finance charges (interest). Each month’s loan payment consists partly of principle and partly of interest. Actually, the amount of principle and interest changes each month, although the total remains the same. In the beginning, you pay more interest and less principle. Near the end of the loan, you are paying nearly all principle.
The amount of finance charges you pay depends on the interest rate and the length (term) of your loan. Interest rates can vary between different lenders. The interest rate you pay also depends on your credit score. Someone with poor credit will pay a higher rate than someone with outstanding credit. More about credit later.
Interest rates are generally higher for used cars than for new cars. And longer loan terms have higher interest rates than shorter loans.
At the time of this writing the national average new-car interest rate is about 3.0% for a 4-year car loan and a bit higher for used car loans. Dealers sometimes add a percentage point or two for additional profit. This is called “reserve.”
Buyers with good credit may qualify for special low-interest loans, even as low as 0%, which means no finance charges at all. See the article Where are the 0% APR Car Deals? on our Best Car Deals web site for a list of current 0% loan deals.
The following table shows you how much you’ll pay per month, per $1000 borrowed, for different loan terms and interest rates.
We mentioned earlier that the interest rate you receive for a car loan depends on your credit score. If you don’t know your most recent score, you should. What’s your FICO score? Find out now when you check your credit report for $1 at Experian.com!