There are few areas of financing that are as confusing as interest rate calculations, and how car sellers and financial institutions decide to calculate the interest rate they offer you. This means that before you apply for another loan, it’s worth understanding car loan interest rates better. Not only will a better understanding demystify the car financing process, but it will also help you make the best decision for your needs.
Why are no two interest rates the same?
Ever wondered why you were offered a certain interest rate on a potential car purchase, and a friend looking for a similar vehicle received something different? It’s because there’s no ‘one size fits all’ approach with car loan interest rates, which means that every loan will depend on your unique financial and personal profile.
This can depend on things you can’t change, such as your age (many financers perceive younger drivers to be higher risk in terms of payment) and things you can change such as your credit score (which can be improved by cancelling credit cards and paying off outstanding debt).
Many lenders will score you according to a special system that gauges risk, while others will use the age and make of your vehicle purchase to calculate one. This is why it’s so important to know your credit score and ensure that it is accurate and up to date – you want your application to be as attractive as possible.
If interest rates are so subjective, what are fixed term loans?
Unlike the home loan space, all car financing is fixed for both the rate and term. This is when you pay the one interest rate for the entire duration of the loan period.
If you want to maximise your chances of getting the best possible interest rate, the easiest way you can do this is by saving up a deposit of at least 10% of the loan’s value. This might reduce your interest rate as it means you have less to pay off, and that lenders are risking less should you default on it in the future.
To summarise – interest rates are wholly subjective, but by entering the application process with a decent deposit and a good credit rating will mean you’re more likely to end up with one you’re happy with.
For more information about car loan interest rates, feel free to get in touch with our friendly and knowledgeable team anytime.