Auto loan rate
An auto loan is an affected consumer credit. This means that it is intended for the purchase of a specific object, here a new or used vehicle. The borrower must therefore provide the lender with proof of the use of the amount borrowed. The interest rate (expressed as a percentage of the amount loaned) fixes the amount to be repaid by the borrower and may vary from one lender to another.
What is the interest rate?
The interest rate expresses the price to be paid to be able to borrow, as a percentage of the amount of the loan. For the lender, this represents remuneration for the service rendered to the borrower as well as compensation for the risk of non-repayment. Overall, it takes into account the duration of the loan, the risks incurred by the lender as well as the guarantees. It is set at the conclusion of the credit agreement where the reimbursement payment terms are set up. Two types of rate should be retained: the nominal rate and the annual percentage rate of charge.
The nominal rate of a car loan
The nominal rate of a loan is used to fix interest. For some loans, the rates are regulated but this is not the case for a car loan which is an affected loan and for which the rate is set by the credit institution. Generally, it agrees with that of the market to which is added a percentage influenced by various parameters such as commercial policy or the risks incurred by the organization. However, there is a rate imposed by law, which the credit institution is not allowed to exceed. It is called the "usury rate" and it is the Bank of United States which fixes it each quarter and then publishes it in the Official Journal.
The nominal rate fixes the annual interest payable by the borrower, taking into account the amount of the loan as well as the repayment period, criteria according to which it can vary significantly. Indeed, the rate can increase considerably depending on the chosen repayment term. The longer it is, the higher the total cost of credit will be, even if the monthly payments will be reduced in return.
However, the nominal rate can only represent a limited part of the total cost of credit. It makes it possible to determine the amount of interest on the loan but it does not take into account other costs that are added to the sum that will have to be repaid by the borrower. These costs may in particular include taxes, administration fees, costs linked to guarantees, insurance premiums, etc. The total cost of the loan can only be calculated with the annual percentage rate of charge (APR). Being lower than the APR, the nominal rate is often put forward by credit institutions in order to make the offer more attractive for borrowers. Remember that it is not decisive and that only the overall effective rate will allow you to correctly compare the different loan offers.
The annual percentage rate of charge (APR)
The annual percentage rate of charge is therefore the basis of comparison when you want to choose an auto loan offer unlike the nominal rate which is not the ultimate reference.
The APR includes all the costs related to the granting of the credit including the interest (calculated on the basis of the nominal rate), the administration fees, the costs of any guarantees and insurance (often necessary as part of a car loan. ) but also all the additional charges that the credit organization may require. If you wish to negotiate to obtain a reduction from the lender, you can do so on the nominal rate of the credit but also on the level of the administrative and insurance costs. This is why it is imperative to know the details of all the costs in order to obtain the most advantageous rate.
Thus, the overall effective rate represents the total cost of the loan. It comes in the form of an annual percentage, so it's the best comparison tool when you want to choose between multiple credits.
How is the overall effective rate calculated?
The interest rate can be fixed or revisable (this is the case in particular in the context of a revolving credit). For a car loan, the APR is fixed, that is to say it corresponds to the rate for the entire duration of the loan. Thus, its calculation is made by all the compulsory costs associated with it, the nominal rate constituting the main cost of credit.
Administrative fees have a significant influence on the APR even if they only represent a small part of the total amount to be reimbursed. They can be fixed for certain loans but most of the time they are proportional to the amount of the loan. They generally represent between 1% and 1.5% of the total cost of credit. These application fees correspond to the work carried out by the credit organization and the time necessary for the stakeholders to study the borrower's file and set up the loan offer. It is possible to negotiate these fees.
The total cost of credit also includes insurance contributions (borrower insurance). It is an insurance which guarantees the assumption of responsibility for part or all of the credit in the event of certain unforeseeable events leading to the inability of the borrower to repay the loan. Among them we find the death of the borrower, the total and irreversible loss of autonomy (PTIA), the temporary interruption of work, and the loss of employment. However, it is optional and if you decide to subscribe to it, it is not compulsory to do so with the credit organization granting you the loan, you can contact the insurer of your choice.
Finally, the overall effective rate includes the costs of guarantees or real collateral which are mandatory. It is a guarantee that allows the lender to obtain payment of his claim on the sale product (in this case, a vehicle), in the event of non-payment on the part of the borrower.
Other fees may be added to the total amount of the loan, such as, for example, commissions paid to banking intermediaries or management fees for the loan account opened for the conclusion of the credit agreement.
To summarize, the annual percentage rate of charge makes it possible to reflect all the costs determined or determinable and makes it possible to obtain an overall basis of comparison. The repayment period has a major impact on the final cost of the loan and on the monthly payments. Generally, the interest rate for a car loan varies between 4.5 and 9%.
What to do in the event of a problem with the APR?
It is possible to challenge an incorrect, illegal or absent overall effective rate. There is very little chance that you will find yourself in the latter case or the APR is completely absent if you apply for a loan from a bank or a professional credit institution. However, if this happens, you have the right to take legal action against the credit terms for five years from signing the contract. The organization at fault will then have to pay a fine of 4,500 US dollars and will be exposed to forfeiture of the right to interest or to the replacement of the loan rate by the legal interest rate (approximately 0.04%).
It is more common to see an error in the calculation of the overall effective rate. You can then dispute the credit conditions in the same way, the only difference being the period during which you can contest it which is five years from the time of discovery of the error and not from the time of signing. . Remember that the APR cannot exceed the wear rates set by the Bank of United States. In the event that this happens, the lender risks a fine of 45,000 US dollars, two years' imprisonment and will be required to repay sums unfairly collected. If you ever have any doubts, you can always check the wear rates on the Bank of United States website. For example, in the context of a car loan, the usury rates applying to the 4th quarter of the year 2016 are 20.01% for loans of an amount less than or equal to 3000 US dollars, of 12.99% for loans between 3000 and 6000 US dollars and 6.95% for loans above 6000 US dollars.
How to get the best rate for a car loan?
In order to get the best rate and thus find the most advantageous offer according to your situation, you can use an online credit comparator. This will allow you to have a good overview of the different offers that you can compare depending on the amount you need and the monthly payments you want to pay to repay your credit. Check that the rate of each loan is the annual percentage rate of charge (APR) because it is the one that will represent the total amount that you will have to repay.
When you have chosen the credit offer, before signing the contract, do not hesitate to negotiate the interest rate, in particular with regard to the application fees.