When buying a new car finding the right car loan may be even more important that picking out the right car. After all, in most states you have a grace period after the purchase of a new car when you are allowed to return it if you don’t like it but nothing of the sort exists for the car loan. If you sign for a car loan and realize week, months or years down the road that you made an incredibly bad deal there really isn’t much that you can do. For most people the main way that the interest rate can affect their car loan is by making them pay more or less money over the period of the loan. What an interest rate basically functions as is a fee by the lender for the use of their money over a period of time. With a high interest rate a new car buyer could easily be paying as much as 50% of the car’s total value in interest over the period of the loan, meaning that you could pay $7,500 in interest on a $15,000 car over a period of five to six years. While this is generally something that you will have to worry about if you have bad credit it underscores how important the interest rate can be.
For most people the interest rate will directly correlate with the ease in which they can find financing for a car. Almost anyone can secure financing for a new car at a high interest rate, even those with bad or no credit, because the risk to reward ratio is so acceptable for lenders. On the other hand, securing a loan with a low interest rate is only a possibility for a select portion of the population with good credit and enough money to put down a significant down payment.
Another way the interest rate can affect your potential car loan is by making you want to increase or decrease the length of the loan. For a high interest rate a smaller loan length will save you tons of money because it means that the lender will have less time to charge you interest on the loan. With a good interest rate it may be more tempting to increase the length of the loan in order to reduce the monthly payments.
Over time the interest rate on a car can also result in what most people in the business call “being upside down” on a car loan. This occurs when the owner of a car still owes more on the car than the car is actually worth. More often than not this is a result of a high interest rate which can water down payments and will prevent you from catching up with the value of the car. Owing more on a car than it is worth is not a good spot to be in for anyone and while it can be overcome as long as you continue to make payments the situation itself tend to make people want to quit paying on the car altogether.