If you’re considering buying a car, the interest rate may be the last thing on your mind. However, it’s important to determine how much you’ll end up paying for your vehicle in the long term. Obviously, the larger the loan amount on your car loan, the more interest you will pay over time.
But even if you borrow less money than average to purchase a new vehicle on credit, factors like credit history, down payment and tenure of the loan can impact the overall interest. Therefore, to save yourself from paying a big fortune in interest, you need to consider all these factors before applying for a car loan. Here are a few such factors that can impact the interest rates of car loans:
1. Credit History of the Applicant
The applicant’s credit history can be one of the most important factors affecting your car loan interest. It’s not specified how much weight any lender gives your credit score when deciding your interest rate. Still, it’s commonly accepted that bad credit increases the chances of being charged higher interest rates. The higher your score is, the lower the interest rate on your car loan.
2. Tenure of The Loan
The more time you have on your car loan, the more interest you will save. This is because your lenders will be less likely to charge higher interest on your car loan if it runs for a long time. So consider a long-term loan as some of the cost savings on your car loan.
However, some car loan services offer fixed interest rates for different tenures. Use a car loan calculator to find everything about your loan and interest rates.
3. Down Payment Value
The amount of money you are ready to pay as a down payment is another factor that affects the car loan rate. Most lenders charge lower interest for loans where higher down payments have been made. So this can be one of the sure ways of getting a lower rate on your car loan.
You can work with your lender to calculate a down payment that will not cost you huge chunks in interest. The year of your car is another factor that can affect the interest rate on your loan.
4. Income from All Sources
Lenders will likely charge lower rates if you have multiple sources of income. This is because they know that a borrower with diverse sources of income is less likely to default on loan repayments. So your car loan may cost less if you have a stable source of income. But this will vary between different companies, so do some research before settling on a particular lender.
5. The Lender’s Ability to Repossess the Vehicle
The lender could get hold of your vehicle if you fail to make payments for some time. As a result, some lenders will charge higher interest rates when compared with those car loans, which do not have any collateral in case of default. This may be one of the reasons why banks and other financial institutions charge higher interest rates than auto finance companies.
Conclusion
These are some of the basic factors that can affect your car loan interest rates. But it’s important to remember that other lenders may have factors for calculating car loan interest rates. So before settling down with your lender, do thorough research and comparison to get the best deal for your car loan.