By Rick MacDonnell for GoAuto.ca
Getting a good interest rate with your auto loan involves a lot more than just having a high credit score. Your credit score is the most important piece of the puzzle, but other factors will affect your interest rate, too: the length of your loan, the age of the vehicle you’re buying, and even the state of the economy can impact the terms of your finance agreement.
Getting a low-interest rate isn’t always easy. But there are several things you can do to help your case. Things that really work. We know because we’ve seen them work. At Go Auto, we’ve approved more than 300,000 people for auto loans, ones that work for the customer’s lifestyle and budget.
So today, we’re going to help you understand six factors (other than credit) that are affecting your interest rate so that you can get the lowest rate you can the next time you buy a vehicle.
The Age of the Vehicle
It may seem counterintuitive, but loans for used vehicles often have higher interest rates than new vehicles. For example, the best possible finance rate for new vehicles on GoAuto.ca is 0%, while it’s almost impossible to finance a used vehicle, at any dealership, with less than 4.99% interest.
Why? Because by the time you purchase a used vehicle, it’s already depreciated in value. In most cases, by tens of thousands of dollars. Because of the lower price of used vehicles—and since it costs money to buy, refurbish, store, and market used vehicles—the dealers will recoup some of that cost with a higher interest rate. Also, used vehicles often come with shorter loans, which means dealerships will earn less. A slightly higher interest rate helps them here, too.
The Length of Your Loan
The shorter the loan you take out, the better your interest rate. This is because the bank will receive their money faster, which is good for them. In order to encourage people to take out shorter, more reliable loans, they offer up better rates as a lure.
Another benefit of a shorter loan is that you’ll end up paying less money in interest. 60/72/84-month terms will come with smaller payments, but you’ll be paying them off over a longer period of time.
Want to see how terms and interest rate affect your monthly payment? Try Go Auto’s car loan calculator.
Your Debt-to-Income Ratio
Simply put, the more money you owe to outstanding debts, the less likely you are to repay those debts on time. At least, that will be the perception of you from lenders. If this is the case, they won’t view you as a reliable borrower, and your auto loan interest rate could suffer as a result.
However, the banks will also factor in the amount of money you make. The higher your salary (or, more specifically, the more money you have available after monthly debt payments), the more confidence they will have in you to pay them back on time.
The comparison of your debts to the money you make is known as your debt-to-income ratio. The better this ratio, the lower your finance terms will be when you buy a vehicle.
Your Down Payment
Anything you can do to convince the banks that you’re reliable with money, do it. This includes placing a down payment. It doesn’t have to be a huge sum, either. If you put $3000 on a $30,000 vehicle, that’s just 10% of the cost, but it shows the bank that you’re capable of saving. You appear more responsible, and they like that.
That being said, the more money you can put down the better. Your interest rate will be better, and the amount you’ll have to finance will be smaller. It’s a win-win. But many of us aren’t in a position to save thousands of dollars to put towards a car purchase, so just save what you can and do your best. Even putting $500 is better than nothing.
It also should be noted that if you’re having a hard time getting approved for a high-interest loan, a down payment can often be the difference between an approval and a denial.
When the economy is doing well, businesses can take the money they’ve earned and invest it in financial institutions that will produce a solid return. If these invests occur in the credit industry, the supply of credit will be higher than normal. This, in turn, will lower consumer lending rates because the risk is lower.
Inflation is the degree to which prices of goods increase in an economy. In order to counter rising costs during periods of inflation, lenders can raise their rates. When the opposite is true—say, when inflation is lower—lenders are more willing to lower their rates.
To sum things up, not everything about your car’s interest rate is within your control. But a good amount of it is, so make a plan that’s reasonable for yourself and dedicate yourself to it. There are many ways to improve your credit, but there are other things you can do to help your situation, too.
Find the right vehicle for your financial situation, choose the best payment term you can realistically afford, pay off your debts on time (and when you can, in full), and save up for a moderate down payment. You don’t need to do all of these things, but every little bit helps.