How Interest Rates Work On Car Loans

Are you currently searching for the car of your dreams? Or, are you just looking for anything that can safely take you from point A to B? Either way, you would have been advised about the multiple payment options available for you, based on your credit score and history. If you’re lucky, you can settle the car payment in full, but if that’s out of range, vehicle finance would be the next best thing. 

There are many people who choose to take the loan route and pay it off over a couple of years. In addition to that, you’re also paying off the interest that comes with a car loan. Making the decision to purchase a car can be daunting but understanding how interest rates work on car loans is key to a smooth and bump-free ride.

How Car Finance Works in South Africa

What is a car loan?

A car loan or car finance is the money borrowed from a bank that you would need to repay over a stipulated period of time. The time in which you pay off the loan is indicated in the contract, and it can range between 60 to 72 months. The interest rate will also be added to the loan amount, meaning you would pay more than you initially thought you would.

So, how does interest work on a car loan? The interest that is included in the loan is called a prime interest rate. This is the rate that banks charge car dealerships when taking out a vehicle loan. In order for banks to provide loans, they have to borrow money from the Reserve bank, linking the repo rate and prime interest rate together. In simpler terms, if the repo rate decreases, the interest rate increases.

Importance of Car Loans

When you take out car finance, you’re agreeing to pay back the car over a period of time. During this time, the car is yours to drive around. Many people choose a car loan because they can set aside a portion of the money to go towards the car and still have the benefit of travelling. It’s the better solution if you don’t have the means to buy one in cash. 

Car loans can also help you build good credit, as long as your payments are successful. Another great aspect of purchasing car finance is that your credit score doesn’t have to be super high to qualify, making it accessible for anyone with credit to buy one.

What is a car interest rate?

If you’ve been on the market looking at cars for a while now, you would have noticed that the amount you see on the car and what you end up paying are two different costs. This is because the total you see on the car is not the final price, interest is added to it. 

As it stands, the current interest rate on vehicle finance in South Africa is sitting at 7 – 8%. It can increase or decrease depending on your credit score, and if you decide to settle for a balloon payment or not. A balloon payment is similar to a deposit; however, it is only paid at the end of your car finance period.  

How does car finance interest work?

There will have come a time where you’ve wondered to yourself how car finance interest works. When you decide to take out a car loan, the bank will charge interest in one of two ways; simple or precomputed. Simple interest is calculated based on the loan balance whereas a precomputed interest loan is based on the total loan amount. 

The majority of car loans are simple interest loans in that the monthly amount you pay goes towards the principle and interest amount. Cars depreciate in value. With this, the interest rate will gradually decrease as you pay off the loan. 

Other Factors That Impact Car Interest Rates & Payments

When purchasing a car through finance, it’s important to understand everything that impacts the interest rate and monthly payments. Below are some factors that can impact the car interest rate:

• Credit score

Everyone needs credit in order to open an account or buy a car. However, you don’t need an impressive credit score to qualify for a car loan.

• Income and employment

In order to qualify for a car loan, you need to generate an income and have a full-time job. This offers the bank and dealership security and betters your chance of getting the loan.

• Loan term

You will pay more towards the car loan and interest if your loan term is long. Most terms are agreed upon on how much you can afford to pay each month.

• Preapproval 

When you want to try to qualify for a car loan, the car dealership will have you fill in forms that they can send to the bank to see if you get approved. This checks your credit score and can give you an idea of what you can afford.

Where can I buy a Subaru car?

Whether you have room in your heart, or garage, for a pre-owned or new car, Subaru has a wide range of offers online now available for you. All you need to do is browse our fantastic dealer specials and book a test drive to get the full experience. Who knows, you might just find the car of your dreams with Subaru. Discover our pre-loved vehicles here or browse our special offers on new cars here. Alternatively, you can learn more about buying a car cash vs car finance.