When you're shopping for a car, understanding interest rates is an important step in the financing process. Interest rates determine how much you'll pay over the term of your loan, directly influencing your monthly payments and total costs.
In this blog, we’ll break down what interest rates are, how they are calculated, and other factors to help you make the best decisions for your financial situation.
What Are Interest Rates?
An interest rate is the cost of borrowing money, expressed as a percentage. For auto loans, this percentage is added to your loan amount and paid over time. While lower interest rates typically reduce the total cost of your loan, slightly higher rates can also make vehicle ownership more accessible, especially for those with little or no credit history.
Ever wonder, “How does interest work on a car loan?” This simple example can help you understand what different interest rates today can look like on the same auto loan:
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A $20,000 loan at 4% interest over five years may result in a total cost of about $22,100.
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At 6% interest, the same loan might cost around $23,199.
While the higher interest brings a slightly higher total, it can allow buyers with limited credit options to finance a reliable vehicle and start building credit for the future.
How Is Interest Calculated On A Car Loan?
Interest on a car loan is typically calculated using simple interest, which is based on the loan's principal amount. The way it's calculated is pretty straightforward – it’s based on the amount you still owe on the loan (this is called the “principal”), the interest rate, and how long your loan term is.
Here’s a simple example:
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Let’s say you borrow $10,000 to buy a car, and your interest rate is 5% per year.
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Each month, the lender charges you interest on what you still owe. So, for the first month, they’d calculate: $10,000 x (5% ÷ 12 months) = $41.67
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That means for your first payment, you’d pay $41.67 in interest, plus part of the loan amount you borrowed.
As you make payments, the amount you owe (the principal) gets smaller, so the interest each month also gets smaller. At the start, most of your payment goes toward interest, but over time, more goes toward paying off the car.
Key Factors That Affect Your Interest Rate
Several factors determine the interest rate you’ll receive on your auto loan, including:
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Credit Score: Lenders use your credit score to assess your financial reliability. A higher score often leads to lower rates, but financing a car with low credit is still possible.
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Loan Term: Shorter loan terms generally have lower interest rates, while longer terms may offer more manageable monthly payments.
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Down Payment: Paying more money upfront can lower how much you need to borrow, which might help you get a better interest rate.
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State of the Economy: We’ll discuss this point more in depth below.
By understanding these factors, you can prepare to get a loan that suits your financial needs.
When Will Car Interest Rates Go Down?
This is one of the most common car loan questions we hear, and it’s completely understandable – interest rates play a big role in how affordable a loan feels. The truth is, predicting exactly when car interest rates will go down is tough because it depends on many factors, like the economy, inflation, and decisions made by the Federal Reserve.
Interest rates in 2025 are still projected to remain higher than they were just a few years ago. This is because the economy is adjusting to changes after years of rate increases aimed at controlling inflation. While it’s possible that rates could decrease in the near future, lenders often adjust rates slowly, so any significant drop might take time.
The good news? Even with higher rates, there are ways to make car financing more manageable:
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Shop around: Compare car interest rates in Oklahoma from different lenders to find the best deal.
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Improve your credit score: A better score can help you qualify for lower rates, even when average rates are high.
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Save for a larger down payment: The more you can put down, the less money you’ll need to borrow, which will decrease the amount of your monthly payments and interest.
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Consider a shorter loan term: These often come with lower interest rates.
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