When it comes to buying a car, the price tag isn’t the only cost to consider. The interest rate on a car loan can also have a significant impact on the overall cost of the loan. Even a small difference in interest rates can make a big difference in the total amount paid over the life of the loan. But how are car interest rates determined? In this blog, we’ll discuss the factors that influence interest rates, how do dealerships determine your interest rates, and the advantages of using a broker.
Factors That Influence Car Interest Rates
The interest rate on a car loan is determined by a variety of factors. Below is a brief overview of a couple of the factors lenders consider to help you understand further how are car interest rates determined.
One of the most significant factors is the borrower’s credit score. Borrower’s with higher credit scores are typically offered lower interest rates, while those with lower credit scores may face higher rates or may not be approved for a loan at all. Lenders view borrowers with higher credit scores as less risky because they are more likely to make their payments on time and in full.
Tip: Check your credit score before applying for a loan, and take steps to improve it if necessary. Paying your bills on time and reducing your credit card balances are simple steps you can take to improve your credit score. Read our blog on Understanding Your Credit Score for more tips.
Another factor to consider is the type and age of the vehicle. Lenders will consider the make, model, year and mileage of a car when setting interest rates. If you are buying a new car, you may be eligible for a lower interest rate than if you are buying a used car. This is because new cars generally have lower maintenance costs and are less likely to break down, making them less risky for the lender.
Tip: Thinking of purchasing a new electric or hybrid vehicle? Look in to what Government Incentives are available in your state to save you additional money.
The amount you’re looking to borrow will also influence the interest rate. Often, the larger the amount, the higher the interest rate may be as the loan represents a larger risk to the lender. However, it’s important to note that the relationship between the loan amount and interest rate is not always straightforward. Sometimes, lender offer better interest rates for larger loans because they will make consistent money over the life of the loan.
Tip: Consider putting down a deposit to reduce the amount of the loan.
Lastly, the current state of the economy can influence interest rates. When interest rates are low, borrowing money is generally less expensive, and lenders may offer more favourable terms to borrowers.
Tip: Keep an eye on interest rates and economic conditions when shopping for a vehicle loan.
How Do Dealerships Determine Your Interest Rates
Car dealerships may offer financing options to customers through their own in-house financing or through partnerships with lending institutions. As well as considering all the factors mentioned above, in some cases, dealerships may mark up the interest rate offered by a partner lender to earn additional profits.
It’s also important to consider that the selection of lenders that the dealership has access to may be limited. This means that you may not be able to compare multiple loan options to find the best deal for your individual needs.
Advantages Of Using A Broker
Whilst understanding how are car interest rates determined is an important aspect of the car loan process, using an experience finance broker will allow you to find the most competitive interest rate. Brokers can often negotiate lower interest rates because they have relationships with multiple lenders and can compare rates and terms. The team at Fido Finance work with a panel of over 40 specialised bank and non-bank lenders, guaranteeing to fetch you your best deal possible. No need to spend hours researching and comparing lenders, our team can do all that for you – saving you time and money!
A Fido Finance auto finance broker makes getting vehicle finance super simple by finding your best rate and staying by your side every step of the finance process until you’re driving away. Get in touch today for an obligation free pre-approval by calling the team on 13 34 36 or visiting us online.