Car loan interest rates vary from person to person. How they compute the interest rate for a car loan depends on several factors. If you want to get the best deal on your car loan, you can manipulate these factors in order to get the lowest interest rate possible. Here are the factors that influence your car loan’s interest rate and what you can do to change them.
Car Loan Interest Rate Factors
- Credit Score. Your credit score is the single, most important factor that will determine the interest rate you’ll get for your car loan. Lenders look into your credit score and your credit history in order to know how risky it would be to lend you money. From your credit score, they would know if you pay all your bills, if you pay them on time and whether or not you borrow within your means. Basically, the higher your credit score, the lower your interest rate.
So even before you apply for a car loan, raise your credit score as much as you can. To increase your credit score you should pay your debts, avoid overcharging your card, pay your credit cards on time, and as much as possible, keep your credit card balance is under 20% of your credit limit. Get a copy of your credit score and correct any errors. You’ll be surprised at how high your credit score actually is once you do the corrections.
- Financing Source. Where you get your car loan can determine how high the interest rate will be. Different car loan terms from different financial institutions means varying interest rates. So make sure to shop around and compare different auto credit terms in order to get the best deal.
- Loan Term. The longer your car loan term, the higher your interest will be. So reduce your loan term if you want to lower your interest, just be prepared for the higher monthly payments.
- New Cars versus Used Cars. New cars loans normally have lower interest rates than used car loans. But there are exceptions to the rule. This would depend on your financing source and the type of used car that you’d want to buy.
- Geographic Location. Car loan terms can vary from state to state. A 36 month new car loan in Arcadia, California could have an interest rate of 4.81%. The same car loan in Montana would have an interest rate of 8.42%.
- Payment Record. Let’s say you got approved for a car loan but the interest you got was a bit higher than you wanted to get. Just keep your monthly payments and establish a good payment record. Lenders are more open to refinancing and lower the interest rates of car loans from customers with good payment records.
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Interesting! Thanks for this info – I can now save money…