Auto Loans 101: How Car Loan Interest Works

Oct 6, 2015

If you’re thinking about buying a new car, you should know how car loan interest works. Many factors determine whether your lender will give you the Holy Grail of auto lending – zero-percent financing – or a higher auto loan interest rate. Understanding this principle will help you get the best auto loans in Dallas for your next purchase.

Factors that Affect Car Loan Interest

  • Credit score. A primary factor that will determine the interest rate you quality for is your credit score. This number is tangible evidence of your ability to manage money and make timely payments. Individuals with a score of 700 or above will qualify for a lender’s best rates. Paying your monthly bills and other loans on time will help you maintain or increase your score.
  • Debt-to-income ratio. Debt-to-income ratio measures the percentage of your income that goes toward debt and other payments, and therefore your ability to repay a loan in the eyes of a lender. The lower the amount of outstanding debt you have, the lower your rate will be.
  • Vehicle age. Nearly all offers for zero-percent financing are tied to new cars. Because older cars have already begun to depreciate in value, lenders are less likely to want to loan money on them. Used cars offered through a manufacturer’s “certified” program may occasionally qualify for no-interest financing.
  • Length of term. The shorter the length of your loan, the quicker a lender can expect to get their money back and the friendlier the terms will often be. Keep in mind that while a short-term loan may include a lower interest rate, your payments will be higher and could put more stress on your budget.
  • Down payment. Putting a hefty amount of money down on a car signals to the lender that you are committed to paying off your loan. Borrowing a large amount of money or putting nothing down entails more risk for the lender, and will probably result in a higher interest rate.

Finance a New or Used Car with City Bank

Let City Bank be your bank of choice when it comes to auto loans in Dallas. You’ll love our competitive rates and easy online application process. Fill out a credit application now to get started on the approval process!