Car loan interest rates: Calculate the factors
When the time comes to get yourself a car or truck (new or second hand), one of the most important steps of the entire process, is getting finance.
Interest rates have never been lower so if you are trying to find a good car loan package, you've chosen a great time to make it happen. Although it’s a good time to be searching for a car loan it’s nevertheless important that you know what elements determine the interest that you’ll get for your loan.
There are several aspects which will impact the loan package you end up with, for instance, the age of your vehicle, your credit history, whether you go with a fixed or variable rate loan, or if you pick an unsecured or secured loan. Being aware what those aspects are and just how they impact your loan will help you to make the right choice when comparing loans.
Getting a vehicle can often seem like a huge undertaking. Aside from the initial, potentially substantial cost, there are a variety of demanding descisions to make about things like add-ons, extended warranties and, most significantly, finance.
If you've got a vehicle in mind, or if you are simply curious, why not try our free car loan calculator to get an estimate on how much your loan payments could end up costing you.
1: Your credit score
One of the more critical factors affecting your loan is your credit score. Any time you apply for a car loan, the lending company will most likely look at your credit report to evaluate the risk of lending to you. Your credit report summarises certain financial factors, including your existing and closed credit accounts, history of repayments and exactly how long you've been actively using credit. You can request one copy of your credit rating per year for free and check out exactly what’s being recorded.
Lenders use credit scores to assess your fiscal responsibility, background and reliability. If your credit standing is good; if there's no missed repayments or defaults, the lending company is more likely to approve your loan with reduced interest rates.
If your credit rating is weak, your selection of loan companies will be limited, and those financial institutions which are prepared to supply you with a vehicle loan, will want to impose a higher rate.
2: Your debt-to-income ratio
A debt-to-income ratio is used to compare how much money you owe lenders against how much money you earn in a given time frame. The ratio is employed to assist a lending company figure out your capacity to repay credit in a timely fashion. For instance people with high debt, even if they have a huge salary, might not be seen as an appealing client if all of their earnings are already going to servicing exsisting debt.
Loan companies look at factors like your career, time spent with your employer, residential status and background as well as your debts and assets. Having a great deal of money in outstanding debts could reduce your perceived credibility as a client, and bring about less appealing conditions. The greater amount of earnings available to you, the greater confidence the lending company will have that you are able to pay them back, and you might be rewarded better terms and conditions.
3: Down Payments
Loan providers figure out car loan interest rates by examining your credit history and by evaluating exactly how much they'll need to lend. Forking over a good portion of your vehicle loan by means of a downpayment can indicate to a potential loan company that you are more likely to pay off your loan on time. The opposite is also true; should you borrow a substantial amount of funds and offer little or no initial downpayment, the risk to the loan provider will increase and result in a more significant interest rate.
Put simply, the lower the loan and the greater the down payment put down, the lower your interest rates will tend to be.
4: New Vs Used
New (or newer) vehicles actually have a tendency to increase your chances of receiving a better rate of interest. The reasoning behind this is actually really quite simple: if something goes awry and causes you to go into default, the lending company can repossess the car and it will still have a relatively high resale value, allowing the lender to more effectively recoup their losses.
Also, statistically speaking, loan repayment histories for newer vehicles are better than they are for older used cars. Whether it’s because the borrowers for brand new vehicles have more secure circumstances, or because they tend to value their vehicle more, new car buyers are typically better borrowers as far as repayments are concerned. As a result, new and almost new cars are seen as significantly less risky and loan providers are likely to offer reduced interest rates to borrowers purchasing newer cars.
The vehicle you are planning to buy doesn’t necessarily still need to be parked in a dealership to get a better interest rate: new car loans can cover cars up to two years old in some cases, with a certain number of kilometres on the clock (the age and mileage differs from lender to lender).
5: The term (length) of the loan
The shorter the term of your loan, the quicker the loan provider can expect to acquire their money back. It's important to understand that even though a short-term loan can come with significantly reduced rates of interest, your repayments will probably be higher and the loan could potentially put more stress on your finances. If you'd like to space out the payments over a longer timeframe you will likely pay a premium.
6: Loan security:
When searching for car finance, you’ll have the choice of selecting either a secured or unsecured loan. The general rule is that interest rates are lower for secured loans than they are for unsecured loans. This is due to the fact that with a secured loan, the lender usues the car that you are buying as collateral so if you don’t make your loan instalments as agreed upon, they can potentially repossess the vehicle and sell it and recover what is owed.
With an unsecured loan, there is more risk involved for the loan provider as they are lending you money with no claim to what you purchase. As a result, the interest rates are typically higher.
7: Where are you buying the car from?
Whether you happen to be buying from a dealership, a private seller or an auction has an effect on the interest rate that you get for your car loan. If you are buying from a dealership, you will have a much wider choice of lenders, including car loan specialists. As a result you will have access to more competitive rates. .
If you are applying for a normal secured car loan, most lenders will prefer to finance vehicles which are being purchased from a dealership or car yard.
This means that while you could possibly get a great deal on the price when buying privately or through a car auction, it could prove more difficult to get a good loan rate.
Many buyers choose dealer finance because it’s the simple option. Nevertheless, dealer finance is not always very competitive (in most cases these finance options are for from competitive). Some dealers even add a commission to their finance options, meaning borrowers pay more than they would elsewhere. If you want to receive the best offer on your car finance, always make sure that you compare all of your options before you sign anything, or use a finance broker that specialises in car finance
8: Fixed or Variable?
With fixed rate car finance, the interest you pay is fixed for the term of the loan. This means that your repayments will always stay the same, making it easier to budget. With a variable rate car loan on the other hand, the interest rate varies according to the lender and the cash rate. A variable loan could potentially allow you to save money on interest if rates fall, but on the flip side, it means you could pay more if rates increase.
9: The bottom line:
There are a lot of factors that dictate how much you will end up paying on a car finance option, some more obvious than others. If you are serious about getting the best deal possible for your situation a little bit of research can go a long way.