You’re up to buy your first-ever car and it could mean a big difference if you could finance it at a lower rate. This would make your auto loan payments affordable and manageable. Given an interest rate’s importance to your auto loan, let’s examine how lenders determine your rate. What roles do credit scores, loan size and more play in the calculation of auto loan rates?
Creditworthiness: Credit Score, History, and DTI
Your credit score is one of the most important factors in determining auto loan rates. It measures your reliability: if lenders can depend on you to pay back what you owe on time. It’s a known fact that lenders award the lowest rates to those with the best credit scores.
Your repayment history, the credit lines you opened and their age, and your credit utilization. All these and more can be seen in your credit report. It forms the basis of your credit score and will be pulled by the lender when you apply for an auto loan.
It’s important to maintain a good credit history, keep it as spotless as you can. If there are issues that can be corrected, repaired or even disputed, work on it to raise your credit score.
If your credit score measures your reliability to pay back the loan, your DTI or debt-to-income ratio measures your ability to repay that loan. This metric lets lenders see how you manage your monthly debts relative to your gross monthly income.
A DTI of 43% is considered acceptable and anything higher than that could mean you are in trouble keeping up with your monthly obligations. The lower your DTI ratio, the lower your auto loan rate will be.
Loan: Size, Down Payment, and Term
The size of your loan can affect the rate it’s going to fetch. However, putting down a large down payment relative to your loan amount could help you to get a lower rate. This demonstrates that you are an able and reliable borrower to the lender.
In contrast, if you take out a large loan and put little to no money down, your lender will see the transaction as risky. And, this could lead to a higher auto loan rate.
Another rate “influencer” is the duration or the length of the auto loan. The longer the loan term, the higher the risk that it won’t be repaid. That’s why shorter-term loans tend to have lower rates compared to their lengthier counterparts.
With shorter-term loans, the monthly payments are higher but less goes to the interest, plus they are paid quicker. On the other hand, longer term loans take more time to be repaid, their payments lower but the interest rates higher.
Vehicle: Age and Type
In determining rates for auto loans, it matters if the car to be purchased is new or used. Lenders impose lower rates on new vehicles compared with used ones. The car would serve as collateral for the loan so lenders have to ensure that it has market value, so to speak. If the car has depreciated in value, it would be riskier for the lenders.
The type of the car also affects your interest rate. Say, a minivan for the family could have a lower rate as opposed to an SUV which lenders deem as riskier owing to the latter’s purpose.
Now you know what moves your auto loan rate. And you can certainly do something about it. Learn about today’s auto loan rates here.»