Understanding the interest rates and how they work on auto loans is vital before signing a deal. A car loan with a longer term and low interest may reduce your monthly financial burden, but you need to determine whether it is the best option. Let’s find out how car loan interest rates work.
Knowing the factors affecting your car loan interest can help you get the most competitive rate.
a) Credit Score and Credit History
A good credit report is more attractive to traditional lenders, meaning you will pay a lower interest rate. Bad credit means you are a risky borrower and will be charged a higher interest rate.
b) Loan Amount and Loan Term
Cheap vehicles are often sold at slightly higher interest than more expensive models. Note that a smaller loan is still costly and comes with fixed costs that a lender must pay to manage the loan duration. Bigger loans tend to be more profitable to the lenders, so they can have more favorable interests.
Rates also differ according to the loan term. A shorter term is usually accompanied by a better interest rate since the financing entity expects a refund sooner, which is advantageous to them. However, long-term auto loans can have a higher interest because cars depreciate quickly, so the buyer may owe more than the car is worth.
c) Type of Vehicle Being Purchased
Loans for used cars carry higher interest rates than brand-new vehicles. Dealers must find ways to recoup the value lost through depreciation, so they charge more interest on pre-owned vehicles. Moreover, used cars have shorter loan terms, so the dealership gets less profit. As such, they charge higher interest to compensate for that.
d) Economic conditions
The credit supply is abundant when the economy is doing well in Canada. Consequently, the lending rates will be low since the risk of borrowing is minimal. To counter the increased costs of inflation, lenders often raise interest rates on car loans.
Getting the best interest rate is a matter improving your credit score and history, and choosing a good dealership to work with. The lower your credit score, the higher the interest rate you will be charged.
To find the best deals, get a lender with competitive rates and sign up for a shorter repayment term, as it’s more affordable when financing an expensive purchase like a new vehicle.
Lastly, save for a larger downpayment. A lender may offer you a lower rate if you put down more money because you loan becomes less risky. Because of the risk of default associated with larger loans, lenders charge higher interest rates with small down payments.
The Annual Percentage Rate or APR refers to the cost you must pay every year after acquiring a car on loan. It reflects the interest rate and also includes prepaid finance charges, e.g., origination fees for underwriting the loan.
Even though you may be enticed by a low-interest rate, you should watch out for APR since it shows the exact cost of financing. Always use the APR to make a car purchase decision in Calgary.
A high-interest rate means higher monthly payments over the life of your car loan. You will likely be paying more in interest over the life of your auto loan than if you took out a car loan with lower interest rates.
Another risk with high-interest auto loans is that if you don’t make timely payments, your lender may repossess your vehicle. Repossession could cost you thousands of dollars in interest and legal fees and prevent you from clearing other debts such as mortgages or student loans.
You cannot control everything about your car’s interest rate, but you can make plans to get the best rates in the market. Start by understanding interest rates for car loans in Calgary. Use the above points as guidelines when shopping for an auto loan.
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