Your home and car are the two most expensive purchases you will likely make. A car is different, however, because most people purchase multiple vehicles in their lifetime. Still, the average person rarely has the cash to buy a car outright, so using financing is unavoidable. When pursuing financing, it is essential to understand how auto loan rates are determined to ensure you can get the best possible deal and save money in the long run. In fact, interest rates can be one of the most significant areas in which you can save money if you take the right approach!
Camino Federal Credit Union has served Montebello with financial products tailored to each member’s needs since 1941. We partner with each member to help them achieve financial success, whatever that looks like for you. Here’s everything you need to know when it comes to factors that may affect your auto loan.
Shifting Gears on Savings: How Auto Loan Rates Are Determined
When explaining how auto loan rates are determined, there are a few key topics to explore. From debunking myths about interest rates on loans for trucks to explaining the different factors that impact rates to providing tips to pay less interest, let’s get into it!
Do Trucks Really Have Higher Interest Rates than Cars?
If a higher auto loan rate than you anticipated is all that has been standing in the way of you and your new shiny truck, we have great news for you! Contrary to popular belief, trucks do not usually have a higher interest rate when compared to cars.
Generally, a truck should have no higher interest rate than if you were to purchase a smaller compact car. So, what actually impacts your rate? We’ve got that covered.
What Auto Loan Factors Impact Interest Rates?
Now that we know there is no difference between auto loan interest rates when it comes to trucks vs. cars, it’s important to understand what could actually affect your loan. The primary factors when learning how auto loan rates are determined include:
- Credit score: When you apply for a loan, lenders run a credit report, and the credit score summarizes certain factors within the report, including your current and closed credit accounts, history of payments, and how long you have been actively using credit.
- Current interest rates: It’s no secret that the economic environment could play a role in determining the loan rates you will be eligible to receive. In a strong economic environment, rates tend to be higher, while they can sometimes be lower in weaker periods.
- Ratio of Debt to Income: Your debt-to-income is an important factor when loan organizations are reviewing your financial position . The ratio is used to help the lender determine your ability to pay off the loan you are applying for in a timely fashion. For example, if you have high debt, even a high income may not be enough to make you an attractive borrower for a lender if most of your income is already going to pay debt.
- Length of the Loan: Lenders are always looking for prospects that demonstrate a positive history with finances and appear promising in terms of debt repayment. Essentially, the loan term accounts for how long you’ll be paying it back. Longer-term lengths often come with higher interest rates.
- Age of the vehicle: The age of the vehicle you are purchasing will also play a significant role in calculating your loan rates. For example, is it a new or a used car? Different loans and rates are available for different types of vehicles. Rates on loans for used cars typically are higher than loans for a new car.
- Down payment and loan amount: The down payment and loan amount will also be important considerations. First of all, the loan amount will be directly tied to the value of the car and what you pay. The bigger the down payment you can make in relation to the value of the vehicle, the more favorable the rates could be that you are eligible to receive.
- Your lender: One of the most important factors to consider is the lender you work with. Usually, if you have the option, getting a loan with a credit union is a good choice. Credit unions like Camino typically offer better rates on car loans than some banks and dealerships.
Understanding all of these factors and more is key to setting yourself up for success when you apply for an auto loan with a credit union.
How to Pay Less Interest Rates on Your Auto Loan
It is important to understand how to maneuver through the financing process to ensure you get great interest rates when learning how auto loan rates are determined. You can take some actions to ensure you get a competitive rate.
First, auto loan interest rates could change frequently and vary widely depending on the lender. We recommend getting pre-approved for an auto loan from a respected financial institution like Camino.
By getting pre-approval on loans, you could have an idea of possible deals and gain an advantage at the negotiating table as a well-informed borrower. Also, consider the timing. If the economy is hot and rates are strong, consider waiting until the market cools.
Another way to pay less interest on your car loan is to secure a shorter loan term if you can afford it. By making higher monthly payments, you’ll pay less interest over the life of your loan. If you have less-than-stellar credit (even if it’s just average), consider improving your credit score.
Saving for a larger down payment could also be a great option. Lastly, be realistic about the vehicle you need, what you can afford, and how much debt you can realistically take on. If necessary, consider buying a less expensive car to pay less interest!
Now You Know How Auto Loan Rates Are Determined. Join Camino for Great Auto Loan Rates in Montebello!
So, now you know how auto loan rates are determined and what you can do to minimize the interest rates you pay on your car loan and make the most of your money. When you work with a reputable institution like Camino, you never have to worry about receiving financing that will steer you away from your goal of building a bright financial future!
Visit our Auto Loans page to learn more about our financing options for you and to work with a local member advisor to receive attentive service.