Lesson 21 of 25 · 6 min

Credit-score tiers and how they move the rate

The same principal at four posted rates is four different interest legs, because the tier is the spread.

A credit-tiered rate is a spread that varies by the borrower. Track 1 lesson 13 is index plus spread; this lesson does not re-teach that split. The tier is the spread. The same principal, at four posted rates, produces four different interest legs because that spread changed.

Ashmere Motors finances $24,980 for 60 months. Illustrative tiers: 4.99 percent pays $471.29 and interest over the life is $3,297.34. 6.99 percent pays $494.52 and interest is $4,690.97. 9.99 percent pays $530.63 and interest is $6,857.70. 14.99 percent pays $594.14 and interest is $10,668.48. The car is the same. The term is the same. The spread is not.

Moving from 4.99 percent to 6.99 percent adds $1,393.63 of interest. Moving from 4.99 percent to 14.99 percent adds $7,371.14. Ten points of rate produced more than a doubling of the time-cost, because the installment formula compounds the spread across every remaining balance. The next lesson sits on that $7,371.14 and separates it from capacity.

On a securities line the index is public and the spread is the lender's margin. On a car the posted APR is often a single figure, with the tier already inside it. The arithmetic does not care which half moved. It cares what rate entered the formula. Four rates, four remainders, one $24,980 principal.

The tier is the spread. It does not change the car, and it does not change how much of the car's mark the loan represents. It changes the time-cost of the same P.

Key terms

Credit-score tier: A posted-rate band assigned by a reading of the borrower. On a car, it is the spread.
Posted APR: The annual rate that enters the installment formula. It may already contain the tier.
Interest leg: Life-of-loan interest at that posted rate. Four tiers produce four legs on one principal.

Worked example

Four tiers, one $24,980

Ashmere Motors. Principal $24,980, 60 months. Illustrative posted rates.

4.99%: Payment $471.29
6.99%: Payment $494.52
9.99%: Payment $530.63
14.99%: Payment $594.14
Extra interest, 4.99% versus 14.99%: $7,371.14

Ten points of posted rate added $7,371.14 of time-cost to an unchanged $24,980. The car did not move. The spread did.

Check yourself

Principal $16,880, 48 months. What is the installment and the interest over the life at an illustrative 5.49 percent, and at 11.49 percent?

A credit-tiered rate is the everyday version of a spread that varies by the borrower, the spread Track 1 lesson 13 adds to an index. Open Variable rates: how index plus spread works →

Saved in this browser only. No account, nothing sent anywhere.

Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.