Autoloans are available from banks, finance companies, and credit unions. And while all three usually offer both finance and lease options, this article will be discussing only the finance options on both new and pre-owned vehicles.
There are two types of rates offered on new vehicles – standard rates and subvented rates. Standard autoloans are based on the current prime rate and are marked up from that prime rate based on the term of the loan (the word “term” refers to the length of the loan). Subvented rates are only offered by the captive finance companies of the auto manufacturers.
Finance companies such as Ford Motor Credit, Nissan Motors Acceptance Corporation and Toyota Motor Credit are either wholly or partially owned by their corresponding manufacturing companies. They receive financial assistance, in the form of cash payments, on various models that allows them to offer below-market rates on certain models the manufacturer wants to move off dealer lots. You should realize that these subvented rates are artificial and have nothing to do with actual autoloans market rates.
That being said, all other variables being equal (vehicle, credit score) the longer the loan term, the higher the interest rate that will be charged. This is due to the fact that shorter loan terms pose less risk in terms of repayment and loan rate fluctuations than longer autoloans. An obvious corollary to this would be that with the same vehicle and the same loan term, the higher the credit (FICO) score, the lower the interest rate. Again, this has to do with the risk factor of the loan – higher credit scores pose a lower risk than lower credit scores.
Autoloans on used cars toss two additional variables into the picture – vehicle age and vehicle mileage. The older a vehicle is (in terms of model year versus the current model year), the higher the interest rate (all other variables being the same). In addition, lenders generally use a base mileage rate for each model year based on 15,000 miles per year for most models and 12,000 miles per year for specialty models (such as expensive sports cars). Used cars that exceed this mileage limit (i.e. over 30,000 miles for a 2-year-old vehicle) will be subject to higher interest rates or shorter loan terms, while vehicles with dramatically lower miles may qualify for longer terms (lower interest rates are usually not offered).
Tags: auto loan