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The Ultimate Guide To Car Loan Interest Rates

The Ultimate Guide To Car Loan Interest Rates

For most people, car loan interest rates are a figure which is provided by a lender in a completely mysterious fashion. The reality is there’s a method for calculating the interest rate on any car loan in Brampton.

By understanding the factors which affect what interest rate a lender will offer for a car loan, you have knowledge on your side. This allows you to work on the items which will improve your chances of getting a lower interest rate on a car loan in Brampton, saving you money and lowering the monthly payment amount.

Learn about these key components of car loan interest rates and more in this ultimate guide.

Intro to Interest

Interest rates for car loans is a topic some people think little about, until it’s too late. Since you’re researching the topic, you’re actually ahead of most other car shoppers, which can help you greatly as you search for a car loan in Brampton.

The interest rate on a car loan greatly affects how much you pay each month. It also impacts how much you can afford to finance. A high interest rate means you can’t buy as expensive of a car, while also dealing with high monthly payments for the loan.

Understanding how interest rates impact a loan empowers you to make an educated, solid financial decision.

Credit History

One of the biggest factors when it comes to car loan interest rates is your credit history. This provides insight into your current and past financial habits, letting lenders know how big of a risk you are for defaulting on a loan.

Credit history is an important factor for loan interest rates.

About once a month, lenders report your activity with credit lines to the credit bureaus. In Canada, there are two major bureaus: TransUnion and Equifax. Lenders tell when you make payments on time, when you’re late and by how much, the total amount of money you’ve borrowed, and how old each loan you have is. How much credit you have available and how much of that is currently being used is also included.

When you apply for credit lines that also shows up on the report as inquiries. All this information is compiled into the report, which any potential lenders can pull and review. This helps when you apply for credit, showing if you have a history of properly managing loans or mismanaging them.

Your credit history is used to create a credit score, ranging from 300 to 900 points. The higher the credit score the better. This is a numerical representation of how responsible the credit bureaus believe you are with loans, which a key component when looking for a car loan in Brampton.

Down Payment

When you buy a car, you don’t have to finance the entire purchase price. If you’ve saved up money, some or all of that can be used as a down payment.

A down payment is cash you pay when you take out a car loan. That means a portion of the purchase price is being paid by you, not financed by a lender. That means you’re invested in the car from the beginning. Lenders like large down payments since people are less likely to stop paying on a loan and lose that investment.

Obviously, the larger the down payment you can supply, the better. While you might not feel good about emptying your savings, many financial experts agree that in an ideal situation you put down 20 percent of the car’s value, if not more. It’s pretty much impossible to put too much down on a car purchase.

Through a down payment, you can significantly shrink the monthly payment amount for your car loan in Brampton. The total you’re borrowing goes down that much. A big down payment will also help keep you from getting upside down in the loan, where you owe more for the car than it’s worth.

Credit Application

What you put on your credit application has a big effect.

When you apply for a car loan, you have to fill out a credit application. Maybe you do it on a website, or maybe you do it in person at a car dealership, but at some point you provide key information about you.

Credit applications ask for all kinds of information, including your name, address, and telephone number. You will need to disclose if you’re renting or own where you live and how much you pay each month. The application will have a spot to fill out who you work for, what you job title is, and how much you get paid. You supply the names of contacts, usually family members or friends who live nearby. In the paperwork, you give permission for lenders to pull your credit report.

All this information is relevant to whether or not you’re approved for a loan, plus the terms of that loan. For example, a potential creditor will see how much you make each month, plus what you pay for housing, and then calculate about how large your car payment will be. If your income is too small compared to your housing costs, that can make the lender uncomfortable with a sizable vehicle purchase price, especially if your down payment is small. These are good things to keep in mind as you try for a car loan in Brampton.

Interest Rate Meaning

The interest rate you get for a car loan represents something important: how much of a risk you are in the eyes of the lender. To calculate this, the lender will look at the entire situation, including your credit report, credit score, down payment, and select items from the credit application.

A higher interest rate means the lender believes there’s a good chance you’ll default on the loan, or stop making payments for at least a period of time. The lower the interest rate, the less of a risk a lender believes you to be.

Term

The term of the car loan in Brampton, or how long you have to pay the lender back, can also affect the interest rate. Exactly how much of an effect a longer or shorter term has depends on the lender. Sometimes, a longer term can run the risk of borrowers missing payments, especially if the car has aged enough it needs repairs, making anyone on a tight budget choose between paying for the car loan and paying for it to be fixed.

Another interesting thing with the interest rate is how it affects what you pay based in part on the loan term. Longer loans help reduce how much you pay for a car each month, but it comes with a catch. Overall, you’ll pay more money in interest, making what you actually pay for the car in the end a greater amount. This is true even when the interest rate stays exactly the same between one loan term and another.

Car Age

The age of the car affects the interest rate, too.

While a used car costs less, lenders view it as a greater risk. Versus a new model, something used is that much closer to needing major repairs, putting you in the position of choosing between paying on the loan or covering shop work. For that reason, an older car with higher miles usually means a higher interest rate for any car loan in Brampton and beyond.

As you’ve probably guessed, new cars can often help you get a much lower interest rate, since they’re under warranty.