Did you know that lenders look at more than just your credit score when it comes to calculating your interest rate? While good credit is a big piece of the puzzle, these four additional factors can help you save money when it comes to your car loan interest.
Four Things That Can Help You Get a Lower Interest Rate for Your Car Loan:
How long do you need the loan for?
The longer the length of time that you have a car loan, the higher the interest rate. But the opposite also applies, and that can translate into significant savings.
Because banks get their money back quickly when you have a car loan for shorter periods, you can expect a better interest rate. In fact, lenders will offer lower interest in an attempt to encourage potential borrowers to take a loan out with them.
How old is the car you’re buying?
Did you know that newer cars are typically more expensive to insure than their older model counterpart? It has partly to do with the replacement value of a new car.
Think of it this way: if your brand new Honda Civic, retailing for approximately $20K was totalled because of an accident, and if eligible, the insurance company would have to pay that ticket price to cover that total loss.
However, if a ten-year-old, high-mileage Honda Civic was totalled, the insurance company could be looking at as little as $2,500 to replace the car, and that’s going to impact your monthly insurance premium.
A car that costs less to replace will typically carry lower monthly premiums.
What is your Debt-Income Ratio?
When it comes to calculating interest on your car loan, lenders will look at your Debt-Income ratio. In other words, they’re looking at the amount of debt you have compared to the amount of money you have coming in - your income.
So, while the overall amount of your salary will definitely be a consideration, the portion of your income that you have available each month to put toward a loan can have a more significant impact on lowering interest rates.
If you have a lot of debt, you might be seen as less than ideal borrower, and that can result in higher interest rates.
The better your Debt-Income ratio, the better your car loan interest rates.
How much was your down payment?
While you might get a loan to cover the entire price of the car, any money you put down toward the loan as a down payment will work to your advantage. Not only will it help a lender see you in a better financial light, but it will also reduce the amount of your overall loan. And it doesn’t have to be a substantial amount.
If you can put $2,000 down on the $20,000 Honda Civic above, that’s 10 percent of its overall cost. And if you’re finding it tough to secure a loan, a down payment can often move your application from the ‘denied’ column to ‘approved’.
Inflation & the Economy
Loans are affected by the overall economy, so when the economy is healthy and doing well, consumers often reap the benefits with lower lending rates. But when the economy is struggling, rates tend to rise.
Inflation and lending rates go hand in hand. During periods of high inflation, lenders frequently raise the rates they offer as a way to offset their costs. And when inflation is low, expect lenders to reduce their rates.
Think of it this way: if your brand new Honda Civic, retailing for approximately $20K was totaled because of an accident, and if eligible, the insurance company would have to pay that ticket price to cover that total loss.