Common Questions About APR's and Financing Your Vehicle.An automobile is one of the biggest purchases you will ever make. When you borrow money to help pay for an automobile, you have to pay an interest rate. The interest rate is simply the premium that you pay for borrowing the money it takes to pay for your car. The Difference Between an Interest Rate and APRAn interest rate is simply "what" you are charged to borrow the money. For instance, 2.9%. Your APR or Annual Percentage Rate is the true cost of the money, that may include any fees that the bank imposes for that loan being given to you. One of the biggest questions we get asked is "What is my interest rate?" At this time, according to bank rate, the average interest rate is just over 4%, but the rate you may receive on a car purchase is really going to be determined by what is shown on your credit report. Those rates can vary from 0% all the way up to 16% for a new car in the State of Florida. What Determines My Interest Rate?There are a myriad of factors that determine your interest rate, the majority of which are going to come from your Beacon Score. Your Beacon Score is a judgment of your credit worthiness. Most people are familiar with the three credit agencies, Equifax, TransUnion, and Experian. What most people do not know is that these agencies only keep track of what your credit file contains - they will not actually give you a score. Issuing a score is done by a company called FICO. FICO stands for The Fair Isaac Corporation. They have a virtual monopoly on issuing FICO or Beacon scores. The matrix they use to issue those scores is one of their most closely guarded secrets. If you are using a credit monitoring company, the scores that you receive are not going to be your actual FICO score, which is what all auto loan and mortgage companies are going to use. What Criteria Does FICO Use to Determine the Scores That All Banks Use to Determine My Interest Rate? Thirty-five percent of this is weighted on your payment history. This tells how well you have paid everything that is in your credit file. The next factor; 30% is weighted on your debt burden. What is meant by debt burden? Let's say you have credit cards, and those credit cards allow you to charge up to. for example, $30,000.00, but currently you have a $27,000.00 balance on them. That would make your debt burden very high and will have a dramatic impact on lowering your FICO score. Conversely, if you have $30,000.00 available credit and you are only carrying $2,000.00, then your debt burden is very low and your FICO score will go up. This brings us to another important point; just because you are not using your credit card does not necessarily mean you should close it. This may not help your credit. Another 15% of the criteria is the length of your credit history. This means how long you have had a credit file. Have you had just two credit cards as a recent college graduate, or have you been in the file for 15 years with a house and multiple car loans? Another 10% will be the type of credit used. If a company sees that you have used maybe a couple credit cards and maybe one installment loan you will not have as high a Beacon or FICO score as someone who had multiple loans that are managed very well. The bottom 10% is going to be determined by how often your credit has been pulled in the last few months. That shows the company how much credit you are looking at taking out and how much of a risk you may be in the future. Those 5 items put together gives you a FICO score which can range anywhere from 300 to 850. 300 is the lowest and 850 is the very highest. All the banks are going to use the criteria they receive from Equifax, TransUnion, and Experian, with the FICO score, provided to judge what your loan should be. Keep in mind this is not the only criteria, but it is over 50% of it. The rest of the time they are going to have internal scores that all different banks will look at. That is why certain banks may come back with a rate of 2.5% while another bank is at 3.2 %. One other thing to bring up about your FICO score; there are certain things that they are not allowed to take into consideration when they give you that FICO or Beacon score. Those are your age, sex, gender, race, where you live, and what you do for a job. Now we've discussed your Beacon and FICO scores, but there is one last thing to discuss. A number of people subscribe to a credit monitoring service to make sure their scores are on the up and up, and to make sure that nobody is trying to steal their credit. Those are all well and fine, but there is only one place you can go to get your true FICO score. The rest of the times what you are being provided with is what some like to call a 'FAKO' score, which has used a different matrix than the one that FICO uses. This is why sometimes you go in to get a loan you expect that your credit is at 710 just like your credit monitoring service told you but, when you are at a dealership or a mortgage company they tell you it is a 680 Beacon, because FICO is the only one that lending institutions will use. If you want to know your FICO scores, go to myfico.com, it will cost you $20.00 and you can receive all of your FICO scores. What Beacon Score or FICO Score Do I Need to Buy A Car? This is a very subjective question, because you may able to buy a car with a 400 Beacon, or you may able to buy a car with an 800 Beacon. The answer really lies in quite a few different things the bank will look at. Some of those intangibles are going to be, but are not limited to: How much money are you putting down?How much of a risk the bank wants to take to extend you the loan?How many auto loans have you had in the past and how well have you paid them?Generally speaking a bank will want to see a 600 or higher beacon in order to be qualified for an auto loan with minimal money down. How Is The Interest Calculated On An Auto Loan? There are three basic different types of loans: simple loans, compounded loans, and the rule of 78's. We are going to ignore the Rule of 78's at this point for this segment, as this type of loan does not apply to loans that are issued in the State of Florida.Simple Interest Loan and a Compound Interest LoanA Compound Interest Loan is like your credit card, you literally pay interest on top of the interest that has accrued. Over 95% of all auto loans done are Simple Interest Auto Loans. The video above does a wonderful job breaking down a simple interest auto loan vs. a compound interest loan. This begins about 6 minutes into the video. How to Calculate The Amount of Interest Charges on Your LoanThis is simple, really. You will take the monthly payment multiplied by your loan life (time period of your loan in months). In our example, this would be $380.00 x 60 months, which would equal $22,800.00. So, in our example you borrowed $20,000.00, and what we will do is subtract that from the figure we just calculated. That difference equates to $2,800.00 and will be the amount of your finance charges over the period of your loan. Keep in mind this will be your figure if you make all 60 payments. A Final Point Before Closing About Having Your Credit Pulled to Obtain Financing. Sometimes people are slightly hesitant to have their credit pulled. They are afraid of what that credit pull is going to do to their credit, and it is a valid concern. However, most people are not aware that if you are searching for a mortgage or auto loan it is written into law that for 14 days any credit pulls that occur from a bank for an auto or mortgage loan have to be combined into just one credit pull. This means that if you shop 5 different banks for an auto loan you do not show as having 5 different credit pulls on your credit bureau report. It will only be taken into account as one as far as your FICO score goes. Consideration of Paying Cash vs. FinancingIf you are looking at a $20,000.00 car and you presently have $20,000.00 in the bank, why should you finance that car? There are certain circumstances where it is much more advantageous for you to borrow the money for that car than it is to just pay cash for it. For instance, if you have a mortgage. Let's say you have a $200,000.00 mortgage and you are 10 years into it. Instead of buying the car with $20,000.00 in cash put that $20,000.00 down towards your mortgage, you will save yourself just shy of $25,000.00 in finance charges over the life of your mortgage because you financed your car. Seventy precent of our graduating college students have student loans and the average repayment term is almost 20 years. If they were to take that same $20,000.00 and put that down on their student loan versus paying for the car with the $20,000.00, they will save themselves over $10,000.00 in finance charges. So, if you have a mortgage or student loans, you probably should not pay cash for a car. Over the long term you could save yourself thousands and thousands of dollars. Used Cars and FinancingOften we get questions about used cars and financing, usually the main question is why the interest rate is so much higher for a used car. The reason is that there is more risk for the bank. If you are financing a brand new car it is going to have somewhere between 3 years and 5 years warranty on it. Used cars, let's say one with 70,000 miles is going to have very little warranty. The bank is a higher risk of default when somebody cannot afford to pay for those car repairs. An older car is also going to start having more problems and even though one may be financing less money, the amount of money they financed versus the value of the car may not be as good as the new car. Is there any difference in the way the finance charges are calculated? Absolutely not, however the older the car the higher your interest rate is going to be.Another question we often get is, how old of a car can you finance. Once again the answer is, it really depends. Generally speaking, yo
