The annual percentage rate (APR) on your car loan is the percentage of the total loan amount that you’ll be charged on top of your monthly payment each month. This is the cost of credit, and it’s how the lender makes money from the loan. No matter how high your credit score, you’ll still have to pay an interest rate on your used car, but the higher your credit, the lower the rate will likely be.
This guide to interest rates on used cars, brought to you by the team at Fred Beans Used, will help you to navigate the waters of choosing the terms of your loan. Soon, you’ll be cruising the streets of Philadelphia, Doylestown, Flemington, or Mechanicsburg in your new-to-you vehicle!
Choose Your Loan Term
Generally, you’ll find that the shorter the term of your loan, the lower your interest rate. Because cars depreciate quickly, it’s best to pay off your loan in as short a time as possible to avoid owing more on the loan than the car is actually worth; this predicament is known as being underwater.
In addition, when the term of the loan is longer, you’re paying the APR for a longer time and therefore spending much more money overall. It’s recommended that if you plan to finance your used car purchase, you should work to pay off the loan in 3 years or less – that’s a 36-month loan term. Your monthly payments should ideally be lower than 20% of your total monthly take-home income, or your income after taxes. You’ll also want to pay a down payment of at least 10% of the car’s value at the start of the loan term.
Interest Rates Based on Credit
Another factor in the interest rate that you’ll be able to get on your loan is your credit score. Based on your past history of paying off loans and paying bills on time, you’ve built up a rating for your financial responsibility known as your credit score. Lenders will look at your credit score to determine how reliable or how risky it will be to provide you with a loan.
The more reliable you are deemed to be, the higher your credit score – and the lower your interest rates. If you’re deemed a risk to paying off the loan on time, the lower your credit score and the higher your interest rates. Don’t worry, though, because no matter how low your credit score, almost everyone is still eligible for a loan!
If you’re concerned about being approved, you can always apply for pre-approval online and get an answer to what your options are before you head to the dealership. Overall, APRs on used cars will likely range from 3% to 20%, depending on your financial situation.
Get Car Financing Today
If you’re ready to get behind the wheel of a used car for your drives around Philadelphia, Doylestown, Flemington, and Mechanicsburg, it’s time for you to check out your loan options. We hope that this guide helped you to learn more about what to expect.
If you have additional questions, don’t hesitate to reach out to Fred Beans Used and speak to a member of our financing team.
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