Which factors determine my loan repayment?
You were approved for the money you need, you have your new vehicle, and now it has come time to start making payments on your loan. What you pay every month for your car loan is dependent on a number of factors. It is worth while shopping around for your car loan before committing, as lender can calculate rates differently than one another, however the following 4 factors pay a part no matter where you go.
At this point, I am pretty sure we have all been beaten over the head with it, but credit is King. Your credit score plays a large role in helping your lender calculate the interest rates and repayment terms of your car loan. Your credit score is a representation of your financial responsibility, and a lender will look at it to assess the level of risk you pose as a loan recipient. Simply put, the better your credit score is, the better you look to your lender which will result in better loan terms for you. On the flip side of that, a less than desirable credit score can be a red flag to your lender and cause your interest rates to rise, which in turn could cost you more in repayment costs.
Initial down payment
How much you are able to put down as a down payment plays a large part in determining your loan repayment. The more you are able to put down initially will help to keep down interest rates, and the length of your repayment terms. Not to mention, the more you are able to put down yourself, the less you will have to borrow. Much like your credit score, your lender will look to your down payment as a marker of your financial responsibility, which will play a role in determining your interest rates. The better your interest rates are, the less you will have to pay on top of the money you owe for the loan.
Size of the loan
This should be a fairly obvious one, but, the bigger the loan you receive the more you will need to pay back (which is why a large down payment is helpful). It is in your best interest to cover as much of the cost that you can by yourself, this way you do not need to take out as big of a loan.
When looking at the size of the loan you are taking out, be sure to think about the Loan to Value (LTV). This Number is calculated by dividing the amount you are borrowing by the value of the vehicle you are purchasing. The lower the LTV ratio you have the less risk your lender is absorbing, which in turn will reward you with better interest rates.
Length of repayment terms
However long of a period of time you agree to pay for the loan can either save or cost you money. While smaller payments over a longer period of time may look desirable, you will end up paying more for you loan in the long run. If you opt to make larger payments over a shorter amount of time, you will end up paying less when it is all said and done. The quicker you are able to pay off your loan, the less interest you will have to pay on top of what you already owe.