How lenders decide the interest rate on my auto loan
Answered by Jim Manelis is a Car Enthusiast and Chase Auto Executive.
Buying and financing a vehicle can seem like a daunting transaction, but you can speed up the process by being prepared with the right information. One of the most common questions people ask is how lenders decide the interest rate for their car loan.
Here are the main factors that most lenders consider:
- Credit score
Probably the most important factor in determining the interest rate on a loan is your credit score. Lenders use credit scores to examine your financial responsibility, history and reliability, which are affected by your on-time payment history, the number of open lines of credit you have, how long those lines of credit are open for. credit and any negative rating. It’s a good idea to know your credit rating and check it for accuracy before discussing your loan interest rate with your lender. Click here for free access to your credit score and report.
- Debt-to-income ratio
Your debt-to-income ratio is a measure of your ability to repay a potential lender. For example, having a lot of unpaid debts could decrease your perceived reliability as a borrower and result in a higher interest rate. If you have disposable income to repay the loan, you can get more favorable terms.
- Amount borrowed and down payment
Lenders look at your creditworthiness and how much money they’ll need to lend you. Making a down payment indicates that you are more likely to repay your loan reliably. Moreover, the down payment reduces the overall loan amount. A lender might increase your interest rate to balance their exposure if you decide to buy or lease without a down payment.
- Vehicle age
Typically, lenders charge a higher interest rate on used vehicles than on new vehicles. Why? Because older cars usually have more wear and tear and there is more risk to a lender with its depreciated value. It’s also good to remember that used car loans often have shorter terms. Lenders look at the average lifespan of this vehicle. Naturally, they’re unlikely to give you a five-year loan if the car only has four years left.
- Mandate’s duration
The shorter the term of your loan, the faster the lender can expect to get their money back and the lower the terms can be. Keep in mind that while the shorter term loan may have lower interest rates, your payments will likely be higher and the loan could put more strain on a monthly budget. So if you want to space your payments, you can pay a premium for convenience with a higher interest rate.
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