If you’re financing a car, knowing how interest rates impact your monthly payments and total cost of the loan is important. CarMoney’s car finance calculator can be a helpful tool in visualizing these factors. The calculator takes in different variables like loan amounts, repayment periods and interest rates and gives an estimate of how much your loan will cost you per month. But to get the best from your car finance deal, you need to know how interest rates affect it.
What Are Interest Rates?
Lenders charge interest rates to the percentage of the amount you borrow. The rate is used on the principal loan amount and tells you how much more you’ll pay over time for car loans. These rates are usually based on the type of loan, your creditworthiness, and current market conditions. But the lower the interest rate, the less you’ll pay in total so it’s important to get competitive rates.
How Interest Rates Affect Monthly Payments
One of the most important factors in deciding how much you will pay each month for your car loan is the interest rate. An increase in interest rate means that your overall loan cost will increase, and therefore your monthly payments will increase as well. But a lower interest rate means you’ll pay less in total over the life of the loan and your monthly financial burden will be lower.
Example Calculation
To understand the impact of interest rates, consider this example: If you take out a loan of £10,000 for 5 years at 6% interest, your monthly payment will be higher than a loan of £10,000 for 5 years at 3% interest even though both loans are for the same amount and term. The car finance calculator from CarMoney will help you adjust these numbers to find out how different interest rates will affect your finances.
The Total Loan Cost
It’s not just about the monthly payment, though — the total cost of the loan is important, too. The interest rate on a loan can add up over the course of a loan, meaning you can end up paying much more than you would have with a lower interest rate. Let’s look at an example: £10,000 loaned over 5 years at 5% interest will cost £11,275 total. But if the interest rate climbs to 10%, the total repayment could be £12,500.
But knowing the total cost helps you not just think in terms of monthly affordability, but also how much you’re actually paying for the entire loan.
How to Find the Best Interest Rates
When shopping around for your car finance, comparing different lenders will get you the best deal. Some methods to secure better rates include:
- Improving Your Credit Score: Borrowers with higher credit scores often receive lower interest rates because they are considered less risky.
- Consider the Loan Term: Lower monthly payments can be achieved by taking out longer term loans, but you’ll likely be paying more in interest. The best way to balance the length of the loan with the rate offered.
- Consider Special Offers: Promotional financing, like 0% interest on qualified buyers, can significantly cut your costs.
The Importance of Down Payments
There are some cases where a larger down payment can also reduce the interest rate you will pay. The less you have to borrow, the more the lender is reducing their risk, and that might encourage a better rate. Furthermore, getting a larger down payment will lower your monthly payments, which would make the monthly payments more manageable in the long run.
Understanding Fixed vs. Variable Interest Rates
Car finance loans typically come with either fixed or variable interest rates:
- Fixed Rates: The interest rates are the same all through the loan, so you know what your monthly payment will be and what your overall costs will be.
- Variable Rates: Your payments can vary depending on market conditions. Interest rates may begin low, but can rise during the life of the loan.
When using a car finance calculator make sure to enter the correct type of rate depending on your loan offer.
Final Thoughts
Car finance interest rates are important not only in terms of your monthly car finance payment but also at the cost of the car finance itself. A car finance calculator can help you understand how different rates will affect your finances. Make sure to shop around, compare rates and take factors such as down payment, credit score, loan term and so on into consideration and make sure you are getting the best deal.
