Last Updated on: 9th December 2024, 03:11 pm
Worried about higher car loan interest rates? Here is an explanation of 8 factors that can affect this interest rate. By understanding these factors you can get an idea of how to reduce the interest rate on your car loan.
8 Factors that impact Car Loan interest rates
1. Credit score
Your credit score plays the most important role in determining your car loan interest rate. A credit score greater than 750 indicates sound financial practices and will often give you lower rates. To avail yourself of a competitive car loan interest, ensure that you maintain an excellent credit score by paying bills on time and keeping credit utilisation low.
2. Income stability and employment type
When a loan institution considers whether to lend to a borrower then they check for a stable income and employment history. Salaried employees who work in with a steady job have a distinct advantage over self-employed people because they are able to plan their incomes more effectively. However, self-employed people providing services on a contract basis with a successful business record can still get Car Loans at competitive rates.
3. The amount of down payment
Lenders take into account the amount of a down payment too. The larger it is, the less you borrow and so risk to the bank or other financial institution will be lessened. Making a substantial downpayment will show your commitment and financial strength. If you go with a 20% downpayment, it could improve your chances of getting a better deal.
4. Ratio of debt to income
The lower the proportion, the more the better you will be able to take on new obligations such as a car loan. Normally, banks would need borrowers whose record of debt to income ratio is less than 36%. This ratio can be improved by clearing existing debts and increasing your income, which may in turn bring down the interest rate on your Car Loan.
5. The loan amount and tenure
A huge part of how much your interest rate is will depend on the loan amount and tenure. One reason those longer loan terms may carry a higher interest rate is because they represent more risk to the lender. But short loan tenures translate into higher EMI. Select a term that aligns with your budget but also limits total interest paid over time.
6. Relationship with the lender
If you have had a relationship with the lender previously, for example, opening a savings account or using another financial product, then it could work to your advantage. Lenders may give loyal customers who have a good banking history preferable interest rates as well. Choose a vehicle loan with your own bank or credit union to see if you can get a better rate.
7. Co-applicants
This would make the loan application stronger for you, since the co-applicant will have a good credit profile and also support with income for paying back. Having a co-borrower increases your chances of receiving the loan because someone is accountable to you for repaying the lender. In this particular case, the lender is likely to be more confident that you will pay it back in time, possibly leading to a lower Car Loan interest rate.
8. Pre-approval
You can even ask the lender for pre-approval. Getting this from more than one lender will allow you to compare the various interest rates and terms that the lenders use to offer. This checks your credit score and gives you an approximation of the loan amount and the approximate interest rate. If you have that many such pre-approved car loans, then you can bargain with lenders about a New Car Loan.
Tips to get Car Loans at better interest rates
- Improve your credit score by paying bills on time and reducing credit card balances.
- Save for a larger down payment to reduce the loan amount and lower interest costs.
- Choose a loan tenure that balances affordability and total interest paid.
- Explore loan options with your existing bank or credit union.
- Consider adding a co-applicant with a strong financial profile.
- Compare pre-approval offers from multiple lenders to negotiate the best deal.
Conclusion
Knowing what contributes to your interest rate on a Car Loan helps you make better decisions and get the best possible deal on a new car loan.
