It is ideal to have a high credit rating when you’re applying for an auto loan. You’d expect that an excellent credit rating would get you the most attractive interest rate. Wouldn’t this make sense?
Sorry to be the bearer of bad news. Yes! An outstanding credit rating is vital. However, attractive interest rates on your auto loan aren’t just about your high credit score.
What are the other pieces of this auto loan puzzle? Well, those who offer auto loans also consider such things as:
- The make and model of the vehicle you’re buying
- How old this automobile is
- How long you want or need your loan to be
Even what is going on with the economy at the time you apply for an auto loan is a factor. As you may have discovered, obtaining an attractive, low-interest, auto loan is no walk on the beach!
But don’t give up. There are several actions you can take to get the best interest rate on your loan. We’re here to help at OfferHub.ca.
How Old is the Car You Want to Buy?
- I know this piece of information is going to make you shake your head in disbelief. Older cars often have higher interest than brand new ones. Yes. You read that right.
- Some new vehicles come with a promise of zero interest automobile loans. On the other hand, the interest rate on a loan for a used vehicle is seldom under 5% and frequently higher.
If this seems backwards, think of it this way: When you buy a used car, it already is worth less than it was new—even if it has only a few miles on it. When vehicles make that transition from “brand new” to “no longer new” they are worth several thousands of dollars less. Ask anyone who drove a new car off the lot and checked its value a month later.
Here’s the thing: Car dealers have to get some of their money back. When they take in a used vehicle as a trade-in, they are faced with expenses like repairs, cleaning, and getting it ready to show on their lot. They’ve got money tied up in that used car waiting for it to sell. Sometimes, they have to cut their losses by auctioning it. This most often results in a lower selling price.
Used vehicles often have a shorter-term loan than new cars, as well. To counteract the costs, dealers offer auto loans on used vehicles at higher interest rates.
Does this mean you should buy a new vehicle or take out a longer term loan? Not necessarily.But, you do need to factor in the interest rate difference on your car loan when you make your decision.
How Long will Your Car Loan Last?
If your parents didn’t tell you to borrow as seldom as you can and pay off loans as fast as you can, then I’d be surprised. That’s the message my parents ingrained in me.
When it comes to auto loans, this is good advice. Pay them off as fast as you can. You’ll get a better interest rate on shortest term loans. Why is this? If the loaning party gets its money back quickly it can loan it out to someone else.
So, if you’re able and willing to take a short-term loan, then the bank or other lending agency will sweeten the deal by giving you a better interest rate.There’s another perk for you besides better interest rates. The faster you pay off that auto loan the smaller the amount of the interest on that loan.
What is Your Debt-to-Income Ratio?
What does this mean? Loaning institutions know from experience and research that those who owe money for several things: mortgage, car loan, furniture loans, students loans, the higher the risk that they will default on any or all of these loans. So, when a loaning company likes a bank or a car dealership looks at how much you owe to other people or institutions. Then, they will discover that a lot of your income has to go toward what you are earning. This is known as your debt-to-income ratio.
If you owe a lot and/or if you have several debts, the institution from which you a seeking a car loan is unlikely to give you an attractive interest rate. Statistically, you are not a good risk. Yes, your income is definitely a factor. If you make a lot compared to what you owe, this is a good thing for you. When it comes to the lending institution setting your auto loan interest rate, your debt-to-income ratio is an important consideration.
How Much Can You Afford as a Down Payment?
Banks and other lending institutions look very favorably on significant down payments. The fact that you have part of the cost of your vehicle proves to them that you know how to budget your income. Even if your down payment is only a few thousand dollars, this amount still gives the lender confidence in you as a borrower. You are seen as a good saver. Just as my parents always told me: Pay off as much as you can right off the top. Make that loan as small as you can and pay it off as fast as you can.
By doing so, you will build up your credit rating, you’ll pay as little interest on that loan as possible and you will get a better interest rate. If it seems like there is no down side to this, then you’re right. We can’t always provide huge down payments. Even a few hundred dollars is a good start. Whatever you can offer as a down payment will certainly improve your auto loan interest rate. Here’s another consideration! If you have had trouble with approval for an auto loan at any interest rate, having a down payment may be the deciding factor on whether a lending institution will approve you for a loan.
What is the Present State of the Economy?
This may seem irrelevant but here’s the thing: If we are in good economic times, businesses are more likely to invest in financial institutions because they can get a good return on investment.How is that good for you? There’s money out there for loans. It’s also a supply and demand thing. The more money available for loans the more attractive the interest rate will be for those wanting to borrow.
What is the Economic Inflation Rate?
Inflation refers to how much goods increase. When the inflation rate is high, lending institutions will naturally raise their interest rates. When the rate of inflation is lower, then those offering loans are more likely to lower the interest rates.So, from these six questions, you can see that it’s not all about you. Having a good credit rating is important. The higher your down payment and the shorter your loan, the better you can expect the interest rate on your loan to be. Other personal factors include: how much you make and how much of that income is already earmarked to pay off debts.
Even things like the cost and age of the vehicle you want to purchase can make a difference when it comes to the interest rate of your loan.
Besides information about your personal situation and your vehicle’s data, there are factors beyond you like the state of the economy and the inflation rate. These are all things that receive consideration when lending institutions set interest rates on vehicle loans.
So what can you do to get the best rate possible? Choose your car wisely. Put down as much as you can afford. Pay off your loan as fast as you can. Retain a good credit history by owing as little as you can and paying it off reliably.