It’s no surprise that car buyers want to save as much money as they can when making a vehicle purchase. After all, the most frequently searched vehicle price range is $5,000 or less. Often, you can take advantage of car dealership specials or purchase pre owned vehicles rather than new models to save some money. Of course, vehicle financing can also help to make payments more feasible. But what exactly determines the amount of interest you’ll pay on your auto loan? Let’s take a closer look at the factors that are typically taken into account.
How Car Loan Interest Rates Are Determined
- Credit Score: Your credit score does play a role in loan approval and loan interest rates. That’s not to say you won’t be able to secure vehicle financing if your credit is poor, however. It just means that your interest rates are likely going to be higher than what someone with excellent credit would be offered. The upside of this is that by making your loan payments on time, you can improve your credit score. In many cases, lenders will look at your credit history and may offer you a better auto loan interest rate if you’ve made those payments on time in the past.
- Lender Choice: Your choice in lender can have a big impact on the amount of interest you’ll end up paying on your auto loan. You have a few different options here, as you can choose to finance your loan through a bank, a credit union, or directly through your dealership. In many cases, you may be able to receive an interest rate with more agreeable terms through car dealership specials than you might get from a bank or credit union. It pays to find out as much information as you can before making a final purchase decision.
- Type of Vehicle: It might sound counter-intuitive, but new vehicles actually come with better interest rates in most cases. It really comes down to resale value. Used cars experience a more substantial value depreciation, which means you may end up paying a higher interest rate in the end. That doesn’t necessarily mean you should always choose to buy a new vehicle over a pre owned car, but it is something to keep in mind. Don’t forget that new cars are going to cost more in general, so it probably won’t save you money to automatically opt for a new car.
- Size of Down Payment: If you’re willing to put more money down for a loan, the amount you owe on the vehicle will be less overall. That, in turn, will reduce the interest charges you’ll have to pay. You shouldn’t put down your life savings in order to lower your interest rates, but it’s generally a good idea to put down 10% of the vehicle’s selling price or $1,000, especially if your credit is poor.
- Loan Terms: Keep in mind that the longer you have to pay off your loan, the more money you’ll end up paying in interest. Longer loans equal higher interest rates. The flip side of that is that shorter loan terms come with both lower interest rates and higher overall payments. You should aim to make your loan terms as short as possible while ensuring that these payments will be financially feasible for you.
Now that you know a bit more about how your auto loan approval and rates are determined, you can take steps to improve your credit score and make adjustments in other areas (like your vehicle selection) to obtain a loan with better terms. It won’t hurt to make good use of car dealership specials either, as these can allow your payments to be more affordable without sacrificing your ability to provide your own transportation. To learn more about our available vehicles or the car dealership specials we’re currently offering, please get in touch with us today.