When you take out an auto loan, you will have an interest rate. This controls how much you’re going to pay back on top of the principal amount borrowed. These factors could influence what you’ll pay.
1. Your Debt-to-Income Ratio
Your debt-to-income ratio is located on your credit report and shows how much debt you have compared to your income. You want your income to be much greater than your debt to get the best interest rates.
2. Your Vehicle’s Age
Choosing an older vehicle could result in higher interest rates because of the lower value of the automobile. Newer vehicles tend to have lower interest rates.
3. Your Credit Score
A higher credit score gives you better loan options. Try to have a credit score of at least 660 to get a good interest rate. Scores in the 700 or 800 range may get optimal loan rates.
4. Your Repayment Period
If you choose to repay your vehicle over one or two years, the lender may charge you a higher interest rate. Why? They have to make their money from the loan sooner. If you choose a longer loan period, the lender may agree to a lower rate since they collect more money over time.
5. Your Credit History
Do you have bankruptcies or defaults in your credit history? These negative marks could scare off lenders. If you can get a loan despite them, expect a higher interest rate since you’re a higher-risk borrower.
6. Your Income
If you have a lower income and are perceived as a greater risk, you may be asked to pay a higher interest rate. You should make sure you have an income that is balanced compared to the vehicle you want to purchase. With the payments in place, try to spend no more than 10 to 15% of your income on your vehicle each month.
7. Where You Live
Where you live matters. You may have different interest rates in your local area compared to other parts of the country because of the institutions lending in your region.
8. The Loan Type
For automobiles, there are two general ways to pay for cars, car finance or an auto loan. If you go through car finance, you’ll repay the price of the vehicle over time but don’t have your own personal loan. Usually, this comes with a higher interest rate. Car loans can also vary in type, with some being for high-risk borrowers. High-risk loans have higher interest rates.
Shop Around to Find the Best Rates for You
Now that you know the factors that could affect your auto loan interest rates, you can take action to improve your credit score and reduce the likelihood of negative factors impacting you. Shop around with different lenders to find the right rate for your loan before you buy. Doing so will give you better flexibility and help you get a loan you’re happy with.
