June 9, 2023

There are many things that can impact how much you pay on your car loan payment each month. For many people, the payment is the same each month but is established based on factors like the interest rate, the down payment made and the repayment period chosen. 

Understanding what affects your auto loan’s cost may help you avoid getting stuck with a loan payment that is higher than you can afford and will help you protect your credit score. 

What Determines Your Monthly Auto Loan Payment?

There are dozens of things that can influence how much you pay for a vehicle. These seven factors are the most influential.  

  1. The length of the loan. If you choose a three-year loan, it’s going to cost you more per month than if you choose a six-year loan, since the payments are made much faster. 
  2. How much you put down on the vehicle. If you are buying a $20,000 vehicle and have $10,000 to put down on it, you’re only financing $10,000 (plus fees and taxes). The down payment will reduce what you pay monthly in the future.
  3. The interest rate. Be cautious about what interest rate you accept, since even a half a point can make a big difference in your monthly bill. For example, a 4% interest rate on a $36,000 loan over 60 months will cost $663 monthly. The same vehicle would cost $765 monthly at a 10% interest rate. 
  4. Your credit score. A lower credit score means you’re a riskier borrower. Lenders hedge their bets by charging you more interest for the loan since they don’t perceive you as trustworthy.
  5. Your debt-to-income ratio. While this is not the same as your credit score, it is a part of your credit report. It shows lenders if you have too much outstanding debt compared to your income and could influence your auto loan rates. 
  6. The age of the vehicle. Older vehicles tend to cost less, but lenders may make you pay more interest. Why? If you don’t pay the loan and the lender repossesses the vehicle, it isn’t worth as much. The lender is more likely to lose money on an older vehicle than on a newer one. 
  7. Pre Approval. When you have a preapproval letter, you can show that you have a good rate offer already. A car dealership might not offer you that exact loan, but you can use your pre approval letter to negotiate. 

These are not the only factors that might influence your loan, but they are the most likely to do so.

Understand the Factors That Affect Your Loan Before You Buy

Understanding these seven factors can help you get the right loan for your vehicle and minimize the risk of ending up with a loan you can’t afford. Look at loans offered by different lenders and compare them, so you can find the ones most beneficial for your purchase.