If you’re looking at car loans, it pays to be prepared.
We look at some of the factors that can influence the interest rate you can get on a car loan.
What is a car loan interest rate?
When applying for a car loan (or any type of loan for that matter), it’s important to look at interest rates. An interest rate is essentially a fee you’re charged for borrowing money from a lender. It is expressed as a percentage of the total loan amount per annum (or year).
There are a number factors that can influence the potential car loan interest rate you can get – such as your personal finances, credit history, deposits and not to mention the amount of shopping around that you do. Let’s have a closer look at some of these factors.
The first thing a lender will want to see when determining your car loan interest rate is evidence of your financial status. Factors like your current income, other loans or credit you might be paying off and your spending habits have a big influence on your potential interest rate. A way to help reduce this process is to sit down and calculate how much you can realistically afford each month. A car loan calculator can be a great tool to help you figure out how much repayments will cost you.
Vehicle age is another thing that lenders will take into consideration, with some lenders refusing to loan if the car is older than five years. This is because cars are one of the common purchases that lose value (depreciate) over time. If you default on a payment and the lender has to seize your car and sell it, they may not get the full amount they’re owed back from the sale. This is not good business for a lender!
There are some lenders that will still provide a loan for a car over five years old, but they will usually charge a higher interest rate to factor in the additional risk they are taking on with that particular loan.
Your credit score indicates to a lender how much of a ‘risk’ you are as a borrower. Many people think that by applying to multiple lenders at the same time, they can get the best interest rate possible. However, each time you apply for credit, your score can be negatively impacted – so making multiple applications could backfire and end up impacting your credit score which will impact your interest rate. Make sure you’re aware of your credit rating before applying for a loan because if your application is rejected by the lender, this could also impact your credit history.
Did you know that the difference between the highest and lowest car loan interest rates on the market at the time of writing is more than 9% p.a.? While there are some factors outside of your control that can determine your car loan’s interest rate, you can always shop around to give yourself a better chance of securing a good rate. By doing some research, you could be saving yourself thousands in interest payments over the life of the loan. That’s money that could be put towards your home loan, savings, renovations or even a holiday. Ultimately, interest rates are calculated on personal circumstances but there’s no harm in being prepared.