Lending is a risky business. For car loan interest rate, they give out tens of thousands of dollars per person hoping that these individuals will pay them back as per their agreement. Most will adhere to the contract but others won’t. Some may try and fail. In order to make it worth their while to incur this risk, they make borrowers pay interest. This makes the whole operation sustainable for them but it can be a burden on the car buyers. Loan applicants should understand the factors that affect car loan interest rate and try to find the lowest deals available.
New Car vs Used Car
If you compare the rates for new and used cars, then you will notice that the numbers for the latter are slightly higher. That’s because lenders prefer giving loans for new cars. These have more reliable parts so they are unlikely to break down easily. They have a more predictable depreciation rate and resale value, in case the borrower fails to pay and they have to seize the asset. In contrast, used cars can be a mixed bag with customer handling being a major determinant of actual condition.
Shortening the Term
Longer terms mean lower monthly payments but larger total payments over the years due to higher interest rates. Shorter terms mean having to pay more per month yet you actually pay less in total because you enjoy lower interest rates. If the car that you want is forcing you to max out your budget even at 84 months, then perhaps you should consider buying a more affordable car that will let you finish payment in 60 months or less comfortably.
Shopping for Lenders
Every lender has its own internal policies about lending criteria and interest calculations. Some have higher interest rates than others. There are lenders that welcome people with bad credit while others will deny them outright. Shop around and don’t be disheartened. There will always be a place that will open its doors for you and give you a better deal.
Improving Credit Rating
Help yourself by improving your credit rating before filing your loan application. You can do this by paying all of your bills on time, every time. If you have a credit card, then make sure to keep your balances low. You should only open a new line of credit when you need it. If you do all of these within a year or so, then your score should get better. You’ll be in a better position to get a good loan.