What affects the interest rate of a car loan?
So you have your new car picked out, you’ve gone through your checklist of pre-loan questions, and you are ready to commit to a car loan. But, oh no, you forgot to ask about interest rates! No problem, we’ve got you covered. There are several factors that affect the interest rates of car loans; here are the 5 that hold the most weight.
Your credit score
It seems like everywhere you go, credit is king, and a car loan is no different. When determining the interest rate attached to your car loan, your lender will check your credit score and evaluate it accordingly. The better your credit score, the better your interest rates can be. Your lender sees your credit score as a good representation of your fiscal responsibility. Those with a less than desirable credit scores may see higher interest rates to make up for the fact that there are a higher risk borrower.
The down payment you make
The more of a down payment that you are able to make, the quicker your lender will see a return on their investment. In many cases this will in turn reward you with lower interest rates. You have already showed that you are a responsible lender by paying a substantial amount upfront, so they see you as of a less risk as an investment. Not only do you receive lower interest rates by paying more up front, but you pay less in the long run as you have fewer payments to make and less interest to pay.
Duration of loan
How long you decide to take the loan out for plays a factor when determining your interest rates. Lenders want to see their money back as quickly as possible, so if you opt for a shorter loan period, you can be rewarded with nicer interest rates. This is something to keep in mind when opting for your loan duration. Sure you pay less each payment when you choose a longer repayment plan, but after time all the money paid on interest will add up and will cost you more in the end than had you paid in higher, quicker increments.
Age and value of vehicle
While it may sound counter-intuitive, the newer and higher the value is of the vehicle you wish to purchase, the better interest rates your lender will offer you. Older cars tend to carry less value, making it a less lucrative investment for your lender. So they make up for the cost of the car with higher interest rates on your loan.
Type of loan
Lastly, the avenue you take to get your car loan can make an impact on your interest rates. It is in your best interests to shop around for a car loan online before committing, as there may be better deals out there than what has been proposed by your bank. Some lenders cater to those with low credit scores, or to those that can make smaller down payments. Since lenders calculate interest rates differently, you may be passing up a more favorable loan if you neglect to check out various options.