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Purchasing a car is a big decision. You not only want to pick a make and model that is best for your needs, but you will want to make an informed financial decision as well. Cars are not inexpensive. Similar to a house, most people need to take out a loan to make this big purchase. Before applying for car loans, you will need to do some research on the best loan type for the car that is on your wish-list.
When considering loans, you may notice different interest rates. These interest rates may vary based on a variety of factors. There is said to be 6 key factors that affect your car loan’s interest rate. These factors include the type of lender and the type of car that you choose, as well as the current interest rate market. The other three factors are influenced by your personal financial life such as credit score, down payment, and preferred length of the loan. By observing these six factors you can better understand what may be affecting your interest rate, therefore helping you make the best financial decision before making that big purchase.
Type of Lender
There are many types of loan providers out there and some are better than others. Many banks offer auto loans but not all banks offer the best interest rates. There are other types of lenders such as those used through car dealerships. It is common for big name banks and car dealerships to offer high interest rates that will leave you paying more over time. It is said that credit unions offer lower interest rates and more appealing loan offers overall. Don’t just apply to any lender. Find a credit union and do your research to find the best interest rates for your situation.
Type of Car
The type of car that you choose will also have an impact on your interest rate. Some would think that rates would be higher for the brand-new cars, but the reality is that used cars tend to have higher rates. This is because there is a lot of uncertainty with used cars. Their value is harder to determine, and their condition may be more risky. Banks see these things as risk factors and hike up the interest rates accordingly. Newer cars tend to see lower rates, but their overall purchase price will be much higher than that of the used competition.
Loan Term
The term of your car loan is how long you will have to pay it back. These terms vary depending on the lender and your financial situation. Shorter term loans will have lower interest rates, but your monthly payment will be much higher. Longer term loans will have higher interest rates, but the monthly payment will be lower. Take the loan term into consideration when choosing a loan. Can you make a higher monthly payment to avoid higher rates? Plan on what you may be able to afford when it comes to rates and loan terms before accepting a loan offer.
Current Interest Rates
Just like every other purchase in the world today, the economic market drives the price. The same is true for interest rates for an auto loan. While there is not a lot that can be controlled when it comes to the market, keeping an eye on the trends can help you decide when to pull the trigger on applying and accepting a car loan. Waiting for a good time to buy may help you avoid high rates. If you still cannot wait for the best time to buy by market standards, then continue to observe the tendencies of the market to help you make the best financial decisions now and in the future.
Credit Score
One of the most important numbers that will follow every financial decision that you make is your credit score. Lenders use your credit report to make a decision on if they will deem you a responsible or high-risk borrower. Depending on your past credit history, past payments, and past inquiries lenders will either approve or deny your loan request. This number will also impact your interest rate. Great credit scores will receive lower interest rate, as you will be considered a prime borrower. If your score is less than perfect, then expect to see higher rates. This is the banks way of ensuring they get a return on the amount borrowed and then some. If your credit score is not perfect, don’t worry. If you are within the lenders minimum credit requirements, then you may be accepted with a higher rate. If this happens, then you will need to decide if you will accept the higher interest rate on your auto loan.
Down Payment
How big of a down payment that you are able to put down up front will also determine the interest rate that lenders offer you. We know that lenders want to know if you are a low-risk or high-risk borrower. Providing a higher down payment may lower your interest rate as lenders will see that as a lower risk for them. The more that you are able to pay upfront means the less that you are borrowing from the bank. Lenders always want to protect themselves, so proving that you can pay a good amount at the beginning of a loan will help them to see that you are responsible and may result in a lower interest rate on a loan to help you purchase your car.
Closing
If you are purchasing a car, then you will come face-to-face with interest rates. While these rates are not something that you can’t get away from, there are factors that can help your chances of getting a lower interest rate when purchasing a vehicle. By keeping track of your credit score, providing a bigger down payment, and deciding on an affordable loan term, you may be able to get a better rate. As well, by shopping around for the best auto loan rate at credit unions, you may also pay less in interest. Keeping rates in mind when picking out a car is also an important step. Different cars may have different rates. Lastly, observing the market for a key time to buy is also beneficial when taking out a car loan. While this big purchase may weigh heavy on your shoulders, know that understanding your own finances and doing your research can help you achieve a better financial situation and receive the best car loan with lower interest rates.
