Buying and financing a vehicle can seem like a daunting transaction, but you can accelerate the process by being prepared with the right information. One of the most common questions people ask is how lenders decide on what their auto loan interest rate will be.
Here are the main factors most lenders consider:
- Credit Score
Probably the most important factor in determining the interest rate on any loan is your credit score. Lenders use credit scores to review your financial responsibility, history and reliability, which is affected by your on-time-payment history, the numbers of open credit lines you have, how long those credit lines have been open and any negative marks. It's good to know your credit score and review it for accuracy before you discuss your loan interest rate with your lender. Click here to access your free credit score and report.
- Debt-to-income ratio
Your debt-to-income ratio is a measure of your ability to repay a prospective lender. For example, having a lot of outstanding debts could lessen your perceived reliability as a borrower and result in a higher interest rate. If you have available income to pay-down or pay-off some of your outstanding credit, you may get more favorable terms.
- Amount borrowed and down payment
Lenders look at your credit worthiness as well as how much they'll need to lend you. Making a down payment signals that you're more likely to pay off your loan in a reliable way. Plus, the down payment reduces the amount of the overall loan. Your interest rate could be higher if you decide to finance without a down payment.
- Age of the vehicle
Generally, lenders charge a higher interest rate on used vehicles than new vehicles. Why? Because older cars usually have more wear and tear and there's more risk for a lender with its depreciated value. It's also good to remember that used car loans frequently have shorter terms. Lenders look at the average life for that vehicle. Understandably, they aren't likely to give you a five year loan if the car only has four years left in it.
- Length of term
The shorter your term, the faster the lender can expect to get their money back and the lower the rate may be. Keep in mind that while shorter terms may have lower rates, your payment will probably be higher and could put more stress on a monthly budget. But if you choose a longer term for a lower payment, you may pay a higher rate and more interest in the long run.
This is intended for informational purposes only.
