Interest on a car is determined by the risk factor of the borrower to the lender. Interest is charged for the use of the lenders money for the car loan.
A car loan is a secured loan that uses the car as collateral in case the buyer defaults on the loan. If someone does not pay the loan in a timely fashion, the lender can reposes the car and resell it to recoup their invested money.
With this said the higher the risk to the lender means a higher interest rate on the car loan.
Some of the risk factors a lender looks at are listed in this article. Knowing how the lender looks at your loan can help you in finding the best possible loan terms.
The first risk factor the lender will look at is your FICO score. The higher the score, the lower interest rate you will pay.
Using your credit report, the lender can view your credit history and see how well you have previously paid off your debts. If you have been responsible with personal loans, car loans and credit cards, the bank is more likely to extend a lower interest rate.
Good credit means you are a lower risk to the lender.
Therefore, if your credit score is less than perfect, it is a good idea to clean up your credit report as much as possible before you go searching for an auto loan.
Another risk factor the lender will look at is the age of the car.
Buying a new car drops some of the risk to the lender because the car has a better chance of outliving the loan. A newer vehicle will have fewer mechanical problems than an older vehicle, therefore having a higher resale value.
Buying a used car typically yields a slightly higher rate due to the condition of the car. The lender will evaluate the used car to ensure the car will outlive the loan. They will take into consideration the year, make and model of the car as well as the mileage on the car and adjust the interest rate accordingly.
It is a good idea to evaluate whether it is best for you to purchase a new or used car. The amount of interest you may pay could help you decide which direction to go, new or used.
Usually if you have good credit the difference in the standard interest rate on a used vehicle isn’t that much different from a new car. However, if the manufacture is offering a special rate, like zero interest on a new car; then it could make a big difference buying the new car over a used one.
Next is the amount the bank will be financing. Certainly by having a down payment of 10 percent will increase the odds that you can secure a lower interest rate on a car. Whether you are buying a new or a used car, the less you borrow protects the banks investment.
Do what you can to put aside a down payment before you go shopping, it could get you a lower interest rate.
Interest on a car is determined by the risk factor to the lender. Doing whatever you can to achieve a lower interest rate could save you big bucks over the life of the loan.
