Car manufacturers and dealers often have special loan rates available for limited-time promotions. Are these deals worth considering? Do you save money by accepting low-interest loan deals?
We see a lot of variations of low-interest loan rates from car manufacturers. Some are 3.9%, some, 1.9%, some 0.9%, and even 0%. What’s the difference? Is a 0% APR deal much better than a 1.9% APR deal?
First of all, low-interest loan rates are almost always limited-time promotional deals being offered by finance companies associated with a car manufacturers, such as Ford’s Ford Credit or Honda’s Honda Financial Services. Dealers do not set loan rates. Customers sometimes incorrectly think that, with a high credit score, they should be able to get a 0% or super-low interest rate at any time.
Let’s take a look at how low-interest new-car loans stack up.
We’ll use an example car loan of $25,000 for 4 years (48 months).
If you find a 0% APR loan rate, you pay no interest and you’ll pay nothing for finance charges. Your monthly payment will be $520.83.
If you can only find a 0.9% APR rate, you’ll pay $462.07 in finance charges over the 48 month life of the loan. Your monthly payment will be $530.46.
For a 1.9% APR rate, you’ll pay $981.81 in total finance charges. Your monthly payment will be $541.29.
For a 2.9% APR rate, you’ll pay $1508.19 in finance charges. Your payment will be $552.25.
For a 3.9% APR rate, you’ll pay $2041.20 in finance charges. Your payment will be $563.36.
For a 4.9% APR rate, you’ll pay $2580.83 in finance charges. Your payment will be $574.60.
For a 5.9% APR rate, you’ll pay $3127.05 in finance charges. Your payment will be $585.98.
If you have to pay a higher rate than 5.9% you may be paying either dealer-boosted rates or “sub-prime” rates for people with poor credit. If you have a good credit score, you should question your dealer as to why your rate is so high. You might be able to negotiate a better rate or go to a bank or credit union for a better rate. However, you should always know your credit score before you shop for a new car. What’s your FICO score? Find out now when you check your credit report for $1 at Experian.com! Without a good credit score, you may not be able to qualify for promotional low-interest loans being offered by car manufacturers.
Just for comparison, let’s assume your loan interest rate is a high 9.9% APR. You’ll pay total finance charges of $5377.50 and your monthly payment will be $632.86. This means your car is actually costing you $30,377.50 instead of the $25,000 you would be paying with a 0% APR loan, and your monthly payments are $112.03 higher. A high interest rate, without a large down payment, will almost certainly mean the loan will be “upside down” for most of its life.