HOW IS MY AUTO LOAN RATE DECIDED?

October 29th, 2020 by

Buying a car can be an overwhelming decision. Beyond selecting the vehicle, test driving, and choosing the right dealer, you have to finance the vehicle and understand your options and how it will affect your financial health in the long run. Here are five things that lenders look at to determine the interest rate on your auto loan.
Credit Score

If you are shopping for a new car, you’ve probably realized how important it is to have a good credit score. Lenders will use your credit score to gauge your overall financial responsibility and history when approving an interest rate. Your credit score calculates your payment history, term length of loan, how often you use the accounts, and how many lines of credit are opened. If you need to find out your credit score, visit this site and request a free copy.

Debt to Income Ratio

The debt to income ratio is a measure of your ability to pay a potential lender their money back. If you have a lot of outstanding debt, your perceived reliability as a borrower will decrease and result in less friendly terms. The more available money you have, the more confidence the lender will have in your ability to pay them back. This can result in more competitive terms and lower interest rates.

Amount Borrowed and Down Payment
In addition to your credit score, lenders will look at the amount you desire to borrow from them to finance your vehicle. If you have a significant amount of money to put down initially, this will show the lender that you can and will be responsible paying off the remaining portion of your loan and will lower your monthly payments. On the other hand, if you borrow a large amount of money with making little to no down payment, you will up your risk to the lender and end up paying a higher interest rate.

Length of Term

Similar to all other factors, lenders will try to make a decision for the best length of term for your loan. The shorter the term, the sooner the lender can expect to get their money back, resulting in friendlier terms. However, if you have a short-termed loan, your payments will likely be higher and can put more stress on your monthly budget. If you need lower payments and want a longer time to repay your loan, you will probably pay a higher monthly payment from higher interest rates.

Age of Vehicle

In general, auto loans for used cars will come with higher interest rates than brand new cars. This seems counter-intuitive at first, but it makes more sense knowing used cars have depreciated in value. A potential lender will most likely gain some value by issuing a higher interest rate on older vehicles.

What You Need to Know

The car buying process can be overwhelming. Getting the best interest rate based on your credit situation is often possible. Having a good credit score and a low amount of debt can put you off to a good start. Decide if you have the money to put a down payment on the vehicle to make your monthly payments lower. Remember, the age and amount of the vehicle you intend to purchase will also affect the interest rate, which will decide how much money you end up paying in the long run. Being informed is the best way to start your car buying process.

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