5 Factors That Affect Car Loan Interest RatesDecember 22, 2023
The interest rate plays a big role in car loans, determining the extra amount you pay beyond what you borrowed. Since everyone's situation is unique, their interest rates will vary.
It's not simple to snag a low interest rate, but there are ways to improve your chances. In this blog, we will take a look at some of the factors that affect your car loan interest rates.
Here are five factors that affect your car loan interest rate:
1. Credit score
When you apply for a loan, the lender checks your credit to figure out how responsible you are with debts. A high credit score signals that you've got a good track record of paying what you owe, making you a low-risk borrower. On the flip side, a low credit score suggests you've had some struggles managing debts, making you riskier.
People with high credit scores usually get offered lower interest rates compared to those with lower scores. In simpler terms, a high credit score can save you a bunch of money by getting you a loan with a lower interest rate.
When you're applying for a loan, how much you earn really matters. Having a stable full-time job shows lenders you can handle those monthly payments.
People with regular salaries might find it easier to snag a loan than those who are self-employed. And even among the self-employed, having a registered business can up your chances of getting approved compared to being a freelancer.
3. Length of the loan
The time you take to pay off your loan matters a lot. The longer you stretch it out, the more interest piles up. Loan terms usually go from 36 months up to 72 months. It's all about what fits your monthly budget. If you can manage to pay more each month, your loan term gets shorter, and you end up paying less in total interest.
4. New vs. used car
Interest rates tend to be higher for used car loans. It's because older cars are seen as less reliable and less valuable compared to new ones. Some lenders won't even consider loans for used cars that are over ten years old, and a few might not offer used car loans at all.
So, if you're eyeing a used car, its age can bump up your interest rate. The older the car, the riskier it seems to lenders, meaning a higher interest rate on your loan.
5. Getting a preapproval
When you're getting ready to finance a car through a bank or credit union, getting preapproved for a loan is a smart move. This preapproval involves a soft check on your credit score to gauge your approval odds and to estimate the interest rate and loan term you might get.
You can shop around and get preapproved by a few different lenders to compare rates. Plus, having that preapproval can be a game-changer when you're negotiating at the dealership. If the dealer knows you've got offers from other lenders, they might try to beat those rates to win your business.
In short, you can't control everything about your car's interest rate, but you've got quite a bit within your grasp. Create a realistic plan and stick to it. When you're gearing up to buy a new or used car, remember the above-mentioned points to lock in the lowest possible interest rate on your car loan.