Dealership and other financial institutions that provide vehicle loan financing charge fees for borrowing the funds, which are known as interest rates. Interest rates are determined by a variety of things including, the length of the loan, your credit score, your credit history (including how late payments affect it), what down payment you put in if any, the type of vehicle you’re buying, debt to income stability ratio; as well as economic factors. All Loans have limits on them- some will not allow DTI ratios over 36% for example. Smaller debt is also cheaper than larger debts because interest fees eat up more money per month as debts get larger. Simply put, because one borrower’s financial circumstances may be vastly different from another borrower’s, not every person will qualify for the same interest rates on an auto loan. Understanding how these factors affect the interest rates on your car loan will help you find a more affordable interest rate.
1. Loan Term Length
The longer the loan term, the higher your interest rate will be. Shorter terms give you a lower interest rate.
2. Credit Score
The better your credit score, the more flexible payment options you will have. The lower your credit score is, the higher the interest rates you’ll pay and fewer payment options will be available to you. Car loans are generally made with FICO scores in mind. Here’s what you need to know about car loan interest rates:
A FICO score of 700-780+ is considered to be a good to excellent credit rating with available car loans at an interest rate range between 3% – 4%. A FICO score of 600-699 is considered average or good with options for lower car loan rates from 3%-6%. Similarly, a FICO score of 500-599 falls within the range of very poor or poor credit and has car loan options ranging somewhere in the 6.5%-15.9% range. There are higher interest rates on used vehicle purchases. Interest rates do not usually drop lower than 4.9%.
3. Credit History
If you want the lowest interest rate possible, work on improving your credit history. The better your credit rating, the more options for lower interest rates you’ll have. A credit history in good standing ensures you can maintain your loan payments by paying bills on time. Options are available for those with less-than-perfect credit histories, but interest rates will be higher as a result.
4. Down Payment
It is commonly recommended for borrowers to pay at least 20% of the purchase price in a down payment. However, 10% or lower could also be considered an acceptable down payment as well. The higher the down payment will result in lower interest rates on your loan.
5. Vehicle Status
Older cars typically lead to higher interest rates because the vehicle is used as collateral for the loan. Once driven off the lot, older vehicles usually depreciate quickly, which poses a larger risk to lenders. Older cars need more maintenance over time, which means that lenders take extra caution because these types of loans are viewed as high-risk investments, increasing APR and also results in higher interest rates on loans than with newer vehicles.
6. Debt-To-Income Ratio (DTI)
The DTI of a loan or bill payment is found by dividing the total amount paid in monthly loans and expenses by your monthly income. A high DTI means that more of one’s income goes towards loans and/or expenses, while a low DTI percentage indicates that less money is being spent on loans and related bills. Lenders take a closer look at your debt-to-income ratio to assess your risk of defaulting. The higher the debt-to-income ratio, the higher the interest rates will be on a loan.
7. Employment Stability
If you have held a steady job over a long period with a stable income, your lender will likely offer lower interest rates. Employment history and stability show the lender that you’ll be able to maintain the monthly loan payments for the entire duration of the loan more so than someone who has inconsistently worked or had gaps in employment.
8. The Economy
Interest rates on car loans vary depending on the stability of the economy. When times are good and unemployment is low, interest rates will be higher as people can afford to pay more. During an economic downturn, times are hard and borrowers with lower incomes may struggle to make their payments. When a recession period affects many and unemployment rises, lower interest rates occur to help ease repayment of loans.
Check Competitive Interest Rates Today!
Preparing ahead of time makes the process of buying a car easier. To get the best car loan rates, prepare before you shop. Improve factors that will make a difference like your credit score and history, DTI, and savings for a down payment. We can arrange financing for applicants with any credit score. We have many options available to make it easier to finance your next car! We would love to work with you and get you into the vehicle of your choice. Compare rates with us and apply today!