Making the decision to purchase a vehicle is a major choice and not one that should be taken lightly. Car prices are still higher than they have been historically, which, when combined with current interest rates, can lead to high monthly payments. Understanding the correlation between interest rates and a monthly payment, along with what makes up interest rates themselves, can help you determine whether purchasing a vehicle is a decision you can afford.

Understanding Car Loan Interest Rates and How They’re Calculated

An auto loan monthly payment is made up of two primary factors: interest owed and the principal for that month. The portion attributed to interest owed will be calculated based on something known as an interest rate. Whether you get offered higher interest rates or lower interest rates when car shopping will be dependent on a few factors, but the most notable include:

• Your current credit score and credit history
• The total amount of the loan you are looking at borrowing
• Internal lender policies amidst the current interest rate environment
• The size of the down payment you are contributing

For those unfamiliar with the point of an interest rate, it is essentially how a lender makes their money. For example, if a lender offers to give you a $20,000 loan at 0% interest and only a scheduled principal of $500 a month, then they are breaking even over the life of the loan. By assigning an interest rate, lenders make a slight profit off of every repayment, which, by the time the loan ends, will result in returns on their investment.

The Relationship Between Interest Rates and Monthly Payments

As mentioned, there are two factors that go into calculating the monthly payment owed on a car: principal and interest. The principal is simply the portion of the total loan amount that is due for that period. For example, if you have a $30,000 loan on a new car split up among equal payments over a five-year time period, your monthly principal would be $500.

The remaining portion of your monthly payment will be interest. For calculation purposes, during 2024, the average new car interest rate for a borrower with a credit score between 661-780 was 6.87%. To calculate monthly interest, you would take the interest rate you have, divide it by 12, and then multiply that number by the total loan amount. In this hypothetical example, this would be:

(0.0687/12) * $30,000

When multiplied out this gets you to a monthly interest payment of $171.75. Combining this with the monthly principal value listed above means that your total car payment for a single month would be $671.75 on a $30,000 five-year loan. By the end of the five years, you will have paid your lender a total of $40,305, meaning $10,305 of total interest was paid which is where the lender makes their money.

Loan Terms and Their Effect on Interest Rates and Payments

At a dealership, you will often notice during negotiations over a car that there are different loan tenors you can consider. Five and six-year loans are among the most common (often labeled as 60 months and 72 months), but the actual range can be as short as 36 months to as long as 84 months. When many people look at the above calculation, they automatically assume a longer tenor is better if they have a tighter budget. After all, if you extend the life of a loan, then you are stretching the principal out, which would reduce monthly payments.

While this may be true, it’s important to remember that interest is multiplied against the total loan amount and not the principal due, which is a mistake many people make. Therefore, on a longer loan, you will have reduced monthly payments due to the lower principal, but you will be paying the same interest for a longer period of time. This may actually result in you paying more by the end of the loan than if you went with a shorter loan tenor.

To put this into perspective, let’s consider the above example again using the same terms. This time, we’ll look at a 36-month loan vs. an 84-month loan. During the 36-month loan, your principal would be $833 in addition to the $171.75 of interest, amounting to monthly payments of $1,005. Under the 84-month term, your monthly principal would only be $357 in addition to the $171.75 of interest, amounting to monthly payments of $528.

When multiplied out, though, during the course of your 36-month loan, you will repay $36,180, whereas during the 84-month loan, you will repay $44,352. So, while your monthly payment may be less on an 84-month loan, you will actually be paying $8,172 more than the 36-month loan in the long term due to the interest rate.

Factors That Can Influence Your Car Loan Interest Rate

Taking all of this information into account, it’s clear that interest rates play a major role in your monthly payment and the total amount repaid for a vehicle over time. Therefore, it’s worth looking at the different factors which can affect your interest rate. We covered the specific personal factors that can influence the rate you are provided above, but there are actually ways to lower the effect of that rate on your payments. The most prominent method is to play around with the down payment you are considering for the car. By making a higher down payment, you will directly reduce the loan amount you are borrowing and, therefore, reduce the monthly interest you pay.

To determine what level of down payment you should consider, think about whether you are looking at a new or used car. For a new car, 20% is the general recommendation for an effective down payment. For a used car, though, first calculate your loan-to-value ratio for the vehicle. This is done by dividing the loan amount by the appraised value of the vehicle. For example, if you intend to take out a $15,000 loan for an offer on a car appraised at $15,000, but you make a down payment of $6,000, your LTV would be $9,000/$15,000 or 60%. Lenders view high LTVs as riskier than low LTVs, given a greater risk of default, so to get a favorable interest rate, it’s best to put down more for a used car if possible.

How Endurance Auto Protection Helps With Long-Term Vehicle Costs

Given the current state of the auto market and the high prices associated with both new and used cars, it’s natural to balk a little when thinking about making a purchase. Not to drive the point home further, but don’t ignore the fact that the purchase price of a car is not the summation of its total costs. Maintenance and repair costs will also be in the future, which contributes to what is known as the “total cost of a vehicle” over its life.

By adding an extended warranty, also known as an auto protection plan or vehicle service contract, from Endurance to your vehicle, you can mitigate some, if not all, of these extra costs. For perspective, the Endurance Supreme plan which offers near bumper-to-bumper coverage provides financial protection for mechanical breakdowns related to the engine, transmission, air conditioning, cooling system, seals and gaskets, the fuel system, and so much more.

Some Endurance plans, such as the Advantage plan, even help with maintenance. The Advantage plan offers up to $3,500 in routine maintenance coverage, which helps you keep more money in your wallet. There are a myriad of Endurance Warranty contracts to consider depending on you and your vehicle’s specific needs. In addition to the above, each Endurance contract comes with Elite Benefits that can sweeten your car purchase, such as 24/7 roadside assistance, up to $1,000 in total loss protection, up to $500 in collision discount coverage, and so much more.

Finding the best rates when borrowing money during the car buying experience can be challenging, so the last thing you want after making your purchase is to not be in the financial situation to cover repairs. To avoid this, when you begin to pay back your loan balance, partner with Endurance so that you can protect yourself from mechanical difficulties out on the road.

Protect Your Vehicle and Your Finances with Endurance

There are a variety of vehicle service contracts offered by Endurance that can bolster the protection of your vehicle. Considering the current high price point of new vehicles, as well as used vehicles, having adequate protection is important. The last thing you want is for your newly purchased vehicle to have major breakdowns that cost you thousands of dollars on top of the price you just paid for the car.

By adding an extended warranty or vehicle service contract to your car, you can rest easy knowing that you’re covered out on the road. With savings on both time and costs, you can never go wrong keeping yourself secured on the road. To learn more, contact an Endurance plan advisor at (800) 253-8203 or request a FREE quote online. You can also shop our eStore to see your custom plan recommendations right away.