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A car is one of the biggest purchases many of us make in our lifetimes. Naturally, we want to get the best deal possible, but it’s not just the price of the car we should be concerned about, but also the terms of the car loan, which can add up to plenty more money coming out of your pocket. There are several factors that dealerships, banks and other lenders consider when offering you auto financing.
Used vs. New
Buying a car that has been previously enjoyed by someone else will seriously cut down on the purchase price, but if you’re looking for a loan for your used car, expect to pay a higher interest rate on it than you would on a new car. Some lenders won’t even consider financing a very old car.
Fixed Or Flexible
An important decision to make regarding your car loan is whether it will have a fixed or flexible interest rate. If you choose fixed, your interest rate will remain the same as it is the day you sign the agreement until the car is paid off. A flexible interest rate allows you to take a chance that the market will fluctuate and allow you to pay a lower interest rate. However, the market may also swing in the other direction and you could end up paying a higher interest rate than you started out with. Basically, a flexible rate will vary with the market, while a fixed will stay the same.
Down Payment
The amount of money you have on hand to devote to a down payment can seriously affect your loan interest rate. A lender will usually request a down payment of around 20 per cent of the total price of the car or truck, but the more you’re able to put towards your down payment, the better your interest rate will be.
Price
The total purchase price of your chosen vehicle also has a great influence on your auto loan’s interest rate. The more expensive the car, the higher the interest rate.
Credit Score
As a buyer, your credit score will be a major factor in determining your interest rate on an auto loan. If you’ve established good credit by paying bills on time, repaying loans in full and not accumulating debt, a lender is more likely to see you as a low risk when it comes to paying back the loan they give you for your new car. On the other hand, if your credit score is bad, you may be seen as a high-risk investment, which means the lender will increase your interest rate to cover the increased possibility of you defaulting on your loan.
Time Period
Car loans are usually offered for either 36, 48, 60 or 72 month periods. However, some lenders will stretch the term of the loan out even farther in order to make the monthly payments lower for the borrower. While it may seem like a good idea to spread your loan payments over a longer period of time in order to keep monthly costs down, you must remember that the longer your loan period is, the higher your interest rate will be. The shortest loan terms get the best interest rates.
Location
The city or area in which you live may also have an impact on your car loan. Urban areas with great concentrations of residents usually mean more car accidents and, as a result, more insurance claims, while in rural areas, the chances of accidents are much lower. Because of this, your lender may charge you a higher interest rate if you live in the big city than if you lived on a farm. The local weather is also a factor. Places that receive lots of inclement weather, such as snowstorms, hail or flooding, will have higher interest rates than areas that are more temperate. A lender will also look at the crime rate in your area to determine your interest rate. Finally, they may consider the kind of public services you have where you live. If the roads in your area are well maintained and the response time for emergency vehicles is short, you may get a better interest rate.
End Of Life
A car reaches “end of life” at a dealership when a new model is set to be released. Then a dealer will want to sell off the existing stock as soon as possible. They may give you some leeway to negotiate a lower interest rate.
Recession Deals
During tough economic times, many car companies will offer better financing rates on the vehicles to attract buyers who might otherwise be wary of purchasing a car during a recession.
Combined Loan
If your household owns more than one vehicle, consider combining your loans and getting them all from the same lender. You may be offered a lower interest rate if all of your vehicles’ loans are from the same place.
Keep It Low
Many people forget to factor in the cost of financing when they are considering purchasing a new car. If you keep these factors in mind before you go car shopping, you may be in a position to get a better deal from your lender.
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