Five Factors That Influence Car Loan Interest Rates
What Factors Influence the Interest Rate on a Car Loan?
Typically, the higher the likelihood of loan repayment, the lower the interest rate. This is true whether a consumer applies for a personal loan or a car loan. However, because personal loans are often unsecured, the rates are often higher than for car loans.
Lenders consider the following when deciding whether to approve an auto financing application and what interest rate to offer:
Credit Score and History
When looking at what factors influence the interest rate on a car loan, one of the most important is the customer’s credit score. Purchasers can often secure car financing with a much lower credit score than they can a personal loan.
While many auto loan companies require a credit score of 700, some may approve applications from people with a score of 500 or no credit history at all. However, interest rates are often higher for applicants with low credit scores or limited credit histories.
Income and Debt-to-Income Ratio
Lenders also look at income and debts for proof of the customer’s ability to repay the loan. This is especially important for purchasers with low credit scores or limited credit histories.
Having sufficient income and relatively little debt suggests customers will be able to make their monthly car payments. Employees with full-time jobs may have an easier time securing financing than those who work part-time or are self-employed. Customers with less stable incomes or higher debts may face higher interest rates.
Loan Term Length
Term length is next on the list of factors that influence the interest rate on a car loan. Auto financing terms commonly range from 36 to 72 months but may extend up to 96 months.
Lenders typically charge higher interest rates for these longer-term car loans. The added interest compensates them for the additional risk of default over longer periods, along with the decreasing value of the collateral (in this case, the vehicle).
Down Payment Amount
No discussion of what factors influence the interest rate on a car loan would be complete without considering the down payment amount (or trade-in value). That’s because the lower the loan principal, the less risk there is for the lender.
Customers with large down payments or high trade-in values typically qualify for better interest rates. Conversely, those who can’t afford to put much down (or who aren’t trading in a vehicle) may face higher interest rates.
New vs. Used Vehicle Financing
The type of vehicle also affects interest rates. New car financing often comes with a lower rate. That’s because new cars are worth more and have higher loan amounts that are more profitable to lenders. In addition, people with good credit often (but not always) buy new cars.
On the flip side, used vehicles are worth less, harder to appraise, and less reliable. A higher interest rate helps protect the lender against depreciation, fluctuations in value, and costly repairs (or total breakdowns). For these reasons, lenders rarely offer their longest-term loans on used cars.
Boost Loan Approvals With 1803 Capital LLC
At 1803 Capital, however, we let common sense and extensive experience guide our lending decisions. We are proud to offer some of the most flexible auto financing decisions available.
Contact us today for more information on how our dealer partner program can help you sell more vehicles.
