“What kind of auto loan interest rate can I get?” This is one of the most common questions we get from interested borrowers. Unfortunately, you can never know the exact interest rate you will get for an auto loan. But you can at least estimate it by knowing what affects it.
Your Credit Profile
Your auto loan interest rate is largely affected by your credit profile. By credit profile, we mean your credit history and your credit score. Your credit report is an essential material for lenders to evaluate your eligibility for an auto loan. It contains your credit history which tells lenders practically everything they need to know about how you handle credit and how you are as a payer. You may get a free copy of your credit report every 12 months from the 3 most trusted credit-reporting agencies in the country—Experian, Equifax and TransUnion—through AnnualCreditReport.com.
However, you wouldn’t see your credit score in that free credit report. While you can get the document for free, you have to pay for the score. Finance experts say that it’s better to invest in your credit score when you are applying for an auto loan or mortgage than turn to sources that offer free scores. This is because you need a more accurate idea of the interest rate you will most likely get, and a paid score can give you that.
So, how does your credit profile affect your auto loan interest rate?
Loan defaults, repossession, bankruptcy, and low credit score lower your chances of getting a low auto loan interest rate. For lenders, these are red flags of a high-risk borrower. If you are quite short on cash and are being careful about every penny you spend, you wouldn’t want to go for a high-interest auto loan. And this is the reason why finance experts suggest fixing your credit first, delaying the car purchase, before taking out an auto loan when you have bad credit. This is so you can get approved for a more affordable auto loan once you acquired a higher credit score.
The Repayment Period You Choose
Did you know that you can increase or lower your auto loan interest rate by simply choosing a payoff date? So, you better be careful when choosing between a short loan term and a long loan term. Short terms range from 24 to 48 months while long terms range from 60 to 96 months.
One rule of thumb in auto lending: The longer the loan term, the higher the interest rate. This is regardless of your credit rating. But why is this so?
Lenders charge lower interest rates in short-term auto loans because it isn’t that long before their money is returned. But here’s the irony: Short loan terms come with higher monthly payments compared with long loan terms. But even if the former seems more expensive at first, it really isn’t. Actually, the latter is. Long loan terms may have lower monthly payments but you will pay more interest over the life of the loan. We suggest making some computations as you compare auto loan quotes.
Auto Loan Provider
Being quoted with the exact same interest rate by three different lenders is very unlikely to happen. That’s because lenders are not the same when it comes to the interest rates they charge on their auto loans. Briefly, banks and credit unions, in general, have the lowest auto loan rates in the industry. But some dealerships and online lenders are also catching up.
The Kelley Blue Book suggests checking out offers of at least three different lenders before signing a contract. Doing so allows you to find the best deal. Otherwise, you might unnecessarily miss out on the better offers. It’s also best to monitor the current auto loan rates in Seattle and Washington so you would know which lender charges the low and high interest rates. A great source for that would be Bankrate.com.