A beat-up blue sedan in a parking lot. Cars like this are cheap, but come with hidden costs

Does the type of car you buy affect the interest rate on a car loan?

When you get a car loan, there are a lot of variables that affect your interest rate. Naturally, you’d assume that the type of car you choose would be one of them — and you’d be right.

Let’s take a look at things that actually affect your interest rate and how the car you drive factors into it.

 

A new car vs. used

 

Deciding between a new and used car will have a major impact on your loan’s interest rate. Turn on the TV and you’ll probably see new cars being advertised for 0% interest rates. But walk into a dealership and ask for the same deal on a used car and you’re likely to get a flat-out no. (It’s important to keep in mind few people actually get 0% even on new cars — those are deals reserved for people with stellar credit.)

When looking at used cars, it’s very unlikely you’ll be able to get a rate lower than 4.99%. That’s because used cars have lower resale value than new cars. If you were suddenly unable to make the payments on your car loan and the lender seized your car, they’d have an easier time reselling a vehicle bought new than one going through its second, third or fourth owner. There’s also the fact that an older used car would likely require some refurbishing.

To sum up,  the used car business presents more risk for the lender, which is why they’re able to charge higher interest on used car loans.  

On the plus side, used cars are usually discounted. New cars can experience a 20% drop in their value in the first 12 months of ownership.

 

The mileage

 

This is another aspect of the vehicle that is going to affect your interest rate.

A car with low mileage is much less likely to break down than a car with 250,000 kilometres on it. The latter car will likely command a higher interest rate because there’s a risk it will break down and be too expensive for the new owner to repair — at which point, that owner could question why they’re still paying a car loan at all.

So while a high-mileage vehicle could be a great deal, you have to weigh any savings against the potentially higher interest rate you’ll be paying on it.

 

The make and model

 

This has less of an impact on your interest rate — especially if you’re buying used. While some new cars come with low interest rate offers on popular models, that’s more of a sales tactic used to move models quickly when dealerships have large inventory.

When buying used, a lender will be more concerned with the age and mileage of a car.

 

Your personal finances are what matter the most

 

While the car you choose will impact the rate a dealer will offer, the state of your finances is the single biggest determiner of how much interest you’ll be charged on your car loan.  

Your credit score, your income, and your employment status (full-time or part-time, for instance) will all be taken into account. That’s because a lender is most concerned with how likely you are to be able to service a loan and the chances you might stop making payment.

If you don’t like the interest rate you get, you can always try improving your credit score as a way to try and get a lower rate.