Financing a car involves more than just negotiating the price of the vehicle. Car loan payments and interest rates play a huge role in determining the overall cost of your purchase.

Understanding how they work can help you make informed financing decisions and potentially save money over the life of your auto financing.

What makes up your car payment?

Three key components decide what you pay every month:

• The principal: The financed amount, which is the car’s total cost minus your down payment
• The monthly interest rate: The Annual Percentage Rate divided by 12; the APR is the yearly interest you’re charged
• The financing period: The length of your repayment plan, e.g. 36, 48, or 60 months

Calculating this amount yourself will hurt most people’s heads, but fortunately, Credit Acceptance has a monthly payment calculator you can use to estimate your ongoing financial commitment.

What determines interest rates?

Credit score

Borrowers with higher credit scores (typically 670 and above) tend to receive lower interest rates because they pose less risk to lenders. Conversely, those with lower credit scores may get hit with higher interest rates due to the increased likelihood of default.

Down payment

The amount you put down at purchase can also influence your interest rate. A larger down payment reduces the amount you need to finance, decreasing the lender’s risk and possibly resulting in a more favorable interest rate.

Vehicle age

New and used cars have different interest rates. New vehicles often have the lowest rates among the two. This is not always the case, though.

Debt-to-income ratio

Lenders assess debt-to-income ratio (DTI) to determine repayment ability. A lower DTI could qualify you for low interest rates, while a higher DTI could result in high rates or a denial.

Market conditions

Interest rates change as economic conditions shift. In periods of growth, rates may rise, while lenders offer lower rates to encourage borrowing during economic downturns.

How finance periods affect monthly payments

The finance period — the number of months it takes to repay — directly affects your monthly car payment and total interest paid.

Shorter finance periods

• Higher monthly payments
• Lower total interest paid
• Faster payoff

Longer finance periods

• Lower monthly payments
• Higher total interest paid
• Greater risk of being "upside-down" (owing more than the car is worth)

While a longer term may seem attractive due to lower monthly payments, it increases the total amount of interest paid over time. It’s essential to balance affordability with overall financing costs.

Fixed vs. variable interest rates

Borrowers typically have the option of a fixed or variable interest rate when choosing auto financing.

Fixed interest rates

• Remain the same throughout the finance period
• Provide stability and predictable monthly payments
• Usually start higher than variable rates
• Protect against market interest rate increases

Variable interest rates

• Fluctuate based on market conditions
• Typically start lower than fixed rates but can increase over time
• Offer potential savings if interest rates decrease
• Carry the risk of rising rates, leading to higher monthly payments

Most borrowers opt for fixed-rate financing due to its predictability, though variable-rate financing may be beneficial for the short term or if you expect interest rates to decline.

Avoid feeling pain after financing

By carefully considering all the factors, you can secure more affordable auto financing and avoid paying unnecessary interest. Use our monthly payments calculator to determine costs, then get pre-qualified to see if the finance terms match your financial goals.