If you’re in the beginning stages of purchasing a vehicle, your focus
might be on the color, gas mileage, design and high-tech features that
are specific to the make and model of your car-to-be. While those
factors play an important role in your car-buying decision, knowing
the nitty-gritty details of your auto financing is important, and a
big part of understanding is knowing how interest works.
Auto Financing Interest
Generally, when you take out a car loan or auto financing, the
approving lender (typically a bank or finance company) lets you pay
the money back through monthly car payments over a defined number of
months or years. You are charged interest to compensate the lender for
allowing you to borrow money or pay for your purchase over time.
Most car loans and auto financing use simple interest, which is
interest that is calculated only on the unpaid principal. Auto
financing with simple interest is generally interest bearing where the
amount of interest you owe is calculated on a daily basis on the
unpaid principal balance outstanding. This means the faster you repay
the principal balance, for example by paying more than the standard
monthly payment, the lower your interest charge will be.
Factors that Influence the Interest Rate
A few key factors that can influence the rate of interest you will
pay on your auto financing include:
Your credit score: Generally, the higher your credit score,
the lower the interest rate you will have to pay on financing.
Size of down payment: The more money you have for a down
payment, the less you will have to borrow on the auto loan or
financing, which means you will pay less interest.
Length of car loan or financing: The longer the loan term,
the more interest you will pay when compared to a shorter term.
Improving your credit, saving for a down payment and knowing how your
interest is calculated can make a big difference in how much interest
Are you in the market to purchase a vehicle but need help getting
approved for financing due to having bad credit or no credit history
established? A car dealer enrolled in the Credit Acceptance auto
finance program can help. Simply fill out the Start Your Credit Approval form on our website
to get started!