Car loan rates have a big impact on how much it costs to buy and finance a vehicle. They can vary depending on a number of factors, such as your credit score and the type of vehicle you are purchasing. It’s important to understand the different factors that influence car loan rates so you can make informed decisions about which loan is right for you.
The most influential factor affecting car loan rates is your credit score. The higher your credit score, the lower your annual percentage rate (APR) will be. If you are looking to finance a new or used car, it’s well worth your while to invest time and energy into improving your credit score before applying for a loan.
Generally, lenders offer the lowest rates to borrowers with scores in the top decile. That means if you can raise your credit score to the mid-to-high 700s, you could save thousands of dollars over the life of your loan.
Inflation is also a major factor influencing car loan rates. The Federal Reserve is currently raising interest rates in an effort to combat inflation, which has a direct effect on how much it costs to borrow money. Inflation can cause the cost of financing a vehicle to increase even for those with good credit scores.
Your loan term or repayment period is another factor that can affect your car loan rate. Shorter term loans usually have lower APRs than longer term loans because borrowers are expected to pay back their debt over a shorter period of time. However, keeping your loan term as short as possible is not always an option, especially if you are buying a new or used car that requires a large down payment.
Some lenders charge higher APRs for subprime borrowers than they do for borrowers with excellent credit. This is because they view borrowers with poor credit as more of a risk for not repaying their loan. This can be an obstacle when trying to get a new or used car, and it may require you to seek out second chance lenders who specialize in helping those with bad credit obtain a car loan.
It is also helpful to shop around for car loans and compare rates with multiple lenders before you decide which one to work with. Many lenders have online application processes that allow you to get a sense of which loan types you qualify for and what your rates will be. Some lenders may also offer autopay discounts, which can reduce your APR by a few percent. It is also a good idea to apply for preapproval before shopping for a vehicle so you have a firm understanding of what your potential rate will be. This can help you plan your budget and ensure you have the funds to afford a car loan if approved. Getting a competitive car loan rate is important because it will help you drive away in the vehicle of your dreams at an affordable price.