Why do car loans have interest rates?

I want to buy a car, but I need a loan. My friend told me to shop around for the best interest rate. I'm not quite sure what this means. Why would a car loan have an interest rate?

Answer
Unfortunately, car loans do come with interest rates, so your friend is right that you should shop around.
Lenders charge an interest rate on car loans to make money off the deal. If they didn’t charge an interest rate, they’d essentially be giving you money free of charge. As a result, they wouldn’t make any money as a business.
Interest rates are based on many factors, including:
  • Your credit score
  • Your income and debt-to-income ratio
  • The length of the car loan (the longer it is, the higher the interest rate)
  • Whether you buy a new or used car
Because interest rates can vary greatly, you should always comparison shop to make sure you get the best rate.
When you get a car loan, you’re also required to have full coverage car insurance. This can be a costly venture, so it’s a good idea to compare rates for insurance as well. Use the Jerry app to compare rates from over 50 top insurers so you always save the most money.
Eric Schad
Answered on Nov 16, 2021
Eric Schad has been a freelance writer for nearly a decade, as well as an SEO specialist and editor for the past five years. Before getting behind the keyboard, he worked in the finance and music industries (the perfect combo). With a wide array of professional and personal experiences, he’s developed a knack for tone and branding across many different verticals. Away from the computer, Schad is a blues guitar shredder, crazed sports fan, and always down for a spontaneous trip anywhere around the globe.
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