What to Expect from Your Auto Loan Interest Rates 

Buying a car is going to be one of the most important financial decisions that you will make in your life. We all know that it can be expensive to buy a car in this day and age. In 2022, the average price of a new car was just over $48,000. For comparison, this went up by about $5,000 from the year prior. 

With that in mind, you may need to fill out a car loan application. However, you’ll need to learn what the normal interest rate for a car loan is. Continue reading to learn about your expectations for car loans and the realities you may need to face. 

Interest Rates Are Going Up 

One thing you need to know about the normal interest rate for car loans is that they have been rising over the last year. For example, in 2021, the average interest rate for a car loan was merely 4.3 percent. Fast forward to 2022, that average has increased significantly to 5.7 percent. 

What’s even worse, is that according to the link above, the Federal Reserve is likely going to continue to raise the normal interest rate for car loans to combat inflation. You need to be aware of how quickly interest rates on car loans can rise. And, once you recognize a pattern, you should act accordingly. If the current pace holds on rising interest rates, it could be beneficial to buy a new car for you sooner rather than later. 

Related: The Benefits of Getting Pre-Approved for a Car Loan

Production Shortage 

Another thing you should note here is the current production shortage for new cars and microchips. The lack of microchips currently available is causing fewer new cars to be produced and made available to the public every year. This has been an ongoing issue since the pandemic began. While there have been efforts made to get production back to pre-pandemic status, it is not quite there yet. According to the report, it is looking like production will not hit the same amount until 2024.

This means that the prices for new cars are likely going to keep going up because the production supply is not there to meet demand yet. Additionally, it’s going to make it more important for you to have your finances in order before you apply for an auto loan. 

Have Good Credit 

When it comes to getting a car loan, you will want to ensure that you have good credit. The reason for this is the better your credit score, the more friendly of an interest rate you can expect to get on your car loan. An important thing to keep in mind is people who have credit scores over 800 can acquire financing with under a three percent interest rate for a new car. However, if you have a credit score of less than 500, that interest rate can be a significantly larger percent for a new car. 

The difference in interest rate is even worse with used cars. If your credit score is over 800, you can get an interest rate of around 3.7 percent for a used car. However, if your credit score is under 500 and you want to get financing for a used car, your interest rate could be a staggering 20 percent! 

Consider Loan Length 

Finally, take a further look into how long you want to have this loan. If you can pay it off quicker, you can get a slightly lower interest rate. While the interest rate itself may not be a huge difference if you decide to go from 60 months to 48 months, the total amount of interest that you could end up paying will be different. 

For example, let’s say you bought a new car for $48,000 and put $10,000 down. Your interest rate is five percent and you have 60 months on your loan term. In this situation, you are paying just over $5,000 in interest. 

Now, let’s say you have all of the same information as above except that you decide to pay the loan off in 48 months. Here, you are paying just over $4,000 in interest. So, in that situation, paying off your loan sooner saved you $1,000. Keep this in mind when considering the length of your auto loan. 

Shop for a Normal Interest Rate for a Car Loan 

We hope that this blog serves as a helpful resource as you begin to research auto loan interest rates. If you have any further questions, don’t hesitate to contact us at Lexington M&L today! Click the button below or visit our website to get in contact with our knowledgeable staff!