What Will My Interest Rate Be?

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The time has come to purchase a car. You’ve done some research, pulled together your financial information, and you’re ready to sit down with your favorite credit union lending expert to fill out the loan application. The big question: what interest rate will you get? Will it be good enough to keep your monthly payment within your budget and get the right car for you and your situation? How is your interest rate determined anyway?

When you submit your application, the lender pulls your credit report and, from there, they will determine what your interest rate for your auto purchase will be.  Here are some of the factors that go into that decision:

Credit Score

Your credit score can have a substantial impact on achieving your financial goals. When you are applying for an auto loan, in the most general terms, high credit scores get the lowest rates and the low credit score get the highest rates.

Your credit score is calculated from many pieces of data from your credit report. If you would like a copy of your credit report, visit annualcreditreport.com. If you would like help breaking down your credit report and understanding your best next step to improve your score, stop by any branch or reach out to our credit union financial counselors.

The Length of the Loan

Auto loans are typically available in 12 month increments between 3 and 7 years. The longer the loan term, the more risk the lender is taking on which is reflected in the rate. Even at a higher rate you can sometimes choose a longer term to reduce your monthly loan payment. Remember to compare this with the additional interest paid at that rate over the length of the loan and think through scenarios of how you would handle a negative equity situation.

Loan-to-Value & Down Payment

The formula for loan-to-value is in its name, the amount of the loan divided by the value of the vehicle. For some borrowers this can get over 100% before you even drive off the lot, this is called “being underwater”. This can happen by having to add in negative equity from a previous car loan or adding service protections. The easiest way to decrease your loan-to-value is to borrow less money by adding a down payment or to negotiate the price of the car with the dealership.  Sometimes vehicles are priced above market. Call Federal offers its members tools to aid in this negotiation, CARFAX vehicle history reports and TrueCar’s Auto Buying Service.

Purchasing New vs Used

Often you will see separate rates for new and used vehicles. You have probably heard that cars lose significant value as soon as they drive off the lot. Lenders account for this drop in value for the asset that backs the loan (a.k.a collateral) by charging higher rates.

The Economy

When the Federal Reserve lowers or raises rates to help strengthen our economy, it can also directly affect the rates for auto loans. When times are tough, like we are experiencing now due to the pandemic, rates will remain low to encourage businesses and people to spend and borrow money.


Like most things dealing with money, it helps to plan ahead. If you’re planning a large purchase, the kind that will require a loan, it’s important to speak with your lender as early in the process as possible, so they can provide with all the details necessary to make your purchase process as painless as possible based on your specific situation.

At Call Federal, our loan consultants and branch teams have helped thousands of members get into an auto loan that works for their families. Give us a call, stop by a branch today or email us at [email protected] to talk through your next vehicle purchase.

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