Buying a car is not an easy task. It involves making various critical and stressful decisions and if they aren’t done in a responsible, correct way, it can affect your financial ease in the long term.
Let’s quickly go through the major determinants of your car loan’s interest rate.
1. Vehicle’s Age
A higher interest rate is charged to the loans sanctioned for used vehicles compared to new vehicles. This is because old cars are continuously depreciating due to their age and usage. The company offering the money would make petite to no profit if it doesn’t attach higher interest rates to used vehicle loans. And used car loans are of shorter duration normally.
2. Total Loans You Have Taken So Far
Avoid applying for a certain number of credits in small time duration wherein the lender will feel nervous about giving you a loan. So refrain from having a busy credit history. Be very cautious with the total number of loans you take, all these loan applications would add to your credit score and can even harm it.
3. The Savings You Have
Lenders want to know how much money you have saved so far – this displays firmness, stability and a general healthy monetary accountability. This shows that you have the ability to pay the loan back in a timely manner, so the bank will fix a smaller rate of interest on your car.
4. Credit Score
The borrowers’ credit worthiness is determined by a credit score rating. In order to estimate the risk of lending money to the client, banks and credit card companies use this system. One of the biggest determinants that will determine the interest rate on the loaned car is your credit score. Make sure your score is at a healthy level and decide if it’s worth to go through with this purchase decision.
5. Residential Status
Normally, people who own their own houses or properties or have good financial power obtain a smaller rate of interest on their cars compared to individuals who are renting out homes. Nevertheless, it all depends on the pace of relocations – if you’re renting on the long term, banks will not feel so uncomfortable about loaning you money.
6. History of Employment
Suppose, you have a full-time, steady job, you’ll be less probable to take hasty and fast loans, so your credit score will be at a sensible level. And lenders are more than willing to approve loans to a fully employed 40-year old adult. On the other hand, a 22-year old young man who works part time at a local food joint will have a higher rate of interest on the car.
7. Debt to Income Ratio
The more money you owe, the tougher will be your loan terms. The lender will have lesser confidence that you’ll pay the debt back because your income is not mathematically competent to maintain a larger loan. The financial institution is mainly assuring that they will recover as much money as possible by giving you tougher terms.
Thus, you can see that there are various determinants that decide your car loan’s rate of interest. Are you thinking about taking a new car loan?