How Are Auto Loan Rates Decided?

Since most consumers are unable to pay cash for a car, the acquisition of a car loan is a necessity unless they are satisfied to walk everywhere. Car deals can be structured in a myriad of ways with a host of different terms and interest rates. Let's take a look at some of the factors that a lender will weigh when structuring your car loan.

Credit Score

In recent years, the importance of a good credit score has increased as it has now become tied to things such as your ability to rent an apartment or purchase insurance coverage. A credit score is an indication of an individual's financial health and is the single biggest factor considered by a car lender. The better you have managed your money and your debt, the more eager a lender will be to offer you a loan at a favorable rate.

How Much You Make vs. How Much You Owe

In a nutshell, this may be the simplest method by which to measure the affordability of a car. The more available income you have, the greater confidence the lender will have that repayment will be made.

How Large is the Loan?

Put simply, the size of the loan will be determined by the price of the car and the size of the down payment. A large down payment may indicate to a lender that the buyer will repay in a responsible manner and therefore will offer a more attractive interest rate.

How Old is the Car?

Generally speaking, the older a car is, the higher the interest rate will be to purchase it. The reason for this is simple. A lower-cost car means a shorter Finance term and for the lender to recoup their investment requires them to charge a higher interest rate

Length of Payback

Lenders must also consider the length of the term before they extend a loan offer. The shorter the term, the greater the chance they will make their money back and so the interest rate offered is likely to be low. On the other hand, a short-term note means higher payments that may not be suitable for the consumer. Conversely, extended term rates may minimize the lender's opportunity to maintain a favorable loan-to-value ratio and therefore the customer will pay an inflated interest rate.

What Does All This Mean?

Buying a car isn't as simple as just kicking the tires and going for a test drive. It's not enough to only know the color you want or the engine specifics; you have to know your money, too. To negotiate the best car deal, make sure to protect your credit, be prepared to offer a large down payment and be able to afford the higher payments that come with a shorter term. A car loan calculator can be very helpful in this process.