There are many factors at play that can help to determine the terms of your car loan

4 things that determine the terms of a car loan

So you are in the market for a new car, and subsequently a car loan. There are many factors at play at can affect the length of your loan (typically 24 months – 72 months), how frequently your installments will be (either monthly or bi-weekly), how much you’ll need to pay, and together how those three things help to determine your interest rates. Here are four factors that play a major role in determining the terms of your car loan.

The lender

Because there are many types of loan options out there available to you, the lender itself can play a big factor in determining the terms of your car loan. Different lenders may calculate their terms differently based of a wide range of criteria, so it is best to do your research and see what loan avenue is right for you. If you have any specific concerns, such as a low credit score, or the inability to put down a substantial down payment, be sure to keep that in mind as there are lenders out there who will be able to cater to those needs.

Credit score

Just like with pretty much every other #adulting purchase out there, your credit score will play a fairly significant role. Put simply, the better your credit score the better the term on your loan will be. Your credit score is a representation of your financial responsibly, and your lender will be more willing to offer you a lower interest rate and better loan terms if they see you as a more responsible borrower. If you have a less than desirable credit score, your lender may have to offer you higher interest rates to compensate, or in some cases deny your application all together. However, as mentioned above, do not fear if your credit score is not in the greatest standing, as there are lenders out there that should be able to help you out.

Down payment

The amount that you are able to put down on your initial down payment can help keep the terms of the loan in your favor. The more you put down on your car upfront, the less worried your lender will be when setting interest rates, because they are seeing a good chunk of their return immediately. Not to mention, the larger the down payment, the more options you have to negotiate the length of your term, and size of your payments.

Value of the car

Whether you are buying a used 2004 Honda Civic, or a fresh off the line 2018 Cadillac Escalade makes a considerable difference on your loan terms. If you are looking to keep your payments to a minimum and spread them out over a longer period of time, you will find that harder to do with the 2004 Civic. Lenders are a bit more inclined to offer a longer loan term on car with a newer car and a higher value, rather than an older vehicle that may not last until the end of the term.

Keep in mind however that when factoring in interest rates, a short-term loan is the way to go, as you will see a noticeable difference in the amount of interest you will pay. Interest rates are typically lower for short-term loans as your lender will see their money back quicker than with a long-term loan. This will mean though that your payments will be more than with a long-term loan.