Interest Rates

Vehicle Interest Rates-

If you are looking at two cars of similar price but different monthly payments the difference is due to interest rates.   For illustration I will be using a car priced at $30,000 because the five year purchase payment with 0% interest is a nice round $500.  ($30,000 / 60 payments = $500)

When you pay interest on a vehicle you are paying the interest on the balance you owe on the vehicle over time.  Initially you are paying interest on the entire balance and by the end of the five years you will not be paying any interest as you reduce the amount you owe on your vehicle to 0.  The total interest is divided evenly over all payments so your total payment is the same each month.

A quick way to approximate the amount of interest you will pay per month on a five year purchase is to multiply the car price by the interest rate, multiply this by 2.5 and divide by 60.  Its not exact but it will be close.  Example ($30,000 X 0.05 X 2.5 / 60 = $62.50), with this example at 5% interest rate you will pay an extra $62.50 per month, the exact figure using a payment calculator is around $66. 

On a $30,000 vehicle for every one percent of interest you will pay an extra $13 per month approximately.  May not seem like a lot but using the 5% example above, this is an extra almost $4,000 over the five years...... that is a lot.  Of course as the price of the vehicle goes up, the total interest payable will go up accordingly.  So if you buy a $60,000 vehicle you will pay about $8,000 in interest over the 5 years at 5%.

Most dealerships these days are offering 0% or close to 0% financing on many of their vehicles (newly released models may be slightly higher).  Later posts will discuss specifics of interest rates at different car dealerships.  The one constant anomaly these days is Ford.  Rather than go the low rate route they have been using Employee Price Discounts and Delivery Allowances to reduce their car prices over the last several months, they also use Costco $1,000 rebates hand in hand.  Ford has the most complicated pricing schemes from month to month.  Both between models and even different trim lines of the same vehicle will have different rates and discounts.  Whatever they do it must work because every second SUV vehicle you see on the road these days is a Ford Escape.  In September, Ford had 4.49% financing but up to $5,765 in discounts on Limited trim Escapes, a decent deal no matter how you look at it.  Of course the Escape is dated and a new model is expected out shortly.

Whether you get the good deal from low rates or deep discounts the important thing is to be aware of the interest rate you are paying and any discounts included in the vehicle price.  Ask the salesperson to tell you the total interest included in the payment you will have to make. Again, check the dealer website before you go in so you know what to expect, most dealer websites explain the vehicle payment details better than the salespeople in the dealerships.  Interest rates can make a significant difference in the total you pay for your vehicle.