The Key Factors Affecting Your Car Loan Interest Rates

Many customers ask, “Do interest rates affect car loans?” The answer is yes. Lenders consider factors such as your credit score, loan term, structure, deposit, and whether the car is new or used. Thankfully, that’s where Fox Finance Group comes into play. We will help you understand these factors and secure the best car loan interest rates.

Your Credit Score: The Major Player

Your credit score reflects your creditworthiness and directly impacts your car loan interest rate. Lenders look at your credit score to determine your loan tier, interest rate, and maximum loan amount. The higher your credit score, the better deals, lower rates, and higher loan amounts lenders will offer you. The breakdown below offers key insights into how your credit score ranks and what it means for your loan eligibility.

• 800 Credit Score: Customers with a credit score of 800 and above are low risks for lenders. This score indicates strong financial stability, which is key for a lender when determining whether a customer can make the required repayments.
• 500 Credit Score: With a credit score of 500 or higher, you still have access to great financing options. However, lenders may view this as a slightly higher risk, which could result in higher interest rates.
• 300 Credit Score: Customers with a credit score of 300 or higher are considered higher risk by lenders due to the financial challenges they may face, which could result in higher interest rates.

If your credit score is between 300 and 500 there are still some great options for you in the market. Fox Finance Group can help assess your situation, address key credit factors, and work to secure the best car loan interest rate while guiding you in improving your credit for better future opportunities. If you’re wondering what your credit score is, part of our assessment includes providing you with a copy of your credit file to give you a clear picture of where you stand.

Improving Your Credit Score

It’s okay if your credit score isn’t where you want it to be. Our expert assistance can help you improve your credit score and expand your loan options. Check out our blog on how to “Improve & Protect Your Credit Score”, as it provides helpful insights into things you can do. Equifax is also helpful with their article on ways to improve your credit score. Below are a few simple ways to start your journey in improving your credit score:

• Make Timely Payments
• Limit New Credit Enquiries
• Don’t Over Utilise Credit Facilities

Loan Term and Structure

Loan terms and interest rates go hand in hand. Lenders generally prefer shorter loan terms, as these represent lower risk; as a result, shorter loan terms often have lower rates. On the other hand, longer loan terms often come with higher rates due to the added risk of the loan being repaid over a longer period.

With longer loan terms, the repayment is normally lower, which frees up cash flow for you. However, by repaying the loan over a longer term, you will generally pay more in interest. With shorter loan terms, the repayments are normally higher, but over the life of the loan, you will generally repay less in interest.

We offer a car interest rate calculator to help give you an idea of how much your repayments might be with different loan terms. You can check out our handy car loan calculator, which allows you to enter your desired loan amount and the term you would like for your loan. This will show you how much your repayments will be and how much you can save on interest. Below are a couple of examples, where you can see the difference in shorter vs. longer loan terms in terms of repayments and interest.

The Down Payment (Deposit) Impact

Putting down a deposit on a car loan can help you secure a better interest rate. It shows lenders that you are financially responsible. The larger your deposit, the less money you need to borrow, which makes you less risky to lenders. A larger deposit also improves the loan-to-value ratio (LVR), making it easier to get favourable loan terms.

Loan-to-value ratio is the amount you borrow compared to the car’s current value. It shows how much risk the lender is taking on. Each lender has a different LVR percentage to determine the level of risk.

The lower the LVR percentage for a lender, the less risk they perceive, which results in lower rates and better deals. The higher the LVR percentage is for a lender the more risk they perceive, which can result in higher rates.

New vs. Used Cars

When shopping for your dream car, it is important to understand the difference between new and used cars in the eyes of the lender. Lenders hold a different view around a new car loan interest rate vs. used car loan interest rate, as they both have different factors to consider.

• New Cars: Lower risk for lenders, as new cars will have a higher resale value and are less likely to need costly repairs, making them a safer option for a lender. Purchasing a new car can help secure a lower interest rate from a lender.
• Used Cars: Potential for a higher interest rate due to increased risk for lenders. A used vehicle has already depreciated in value and may require more repairs to keep it running.
• Older/Higher Mileage Vehicles: Due to the increased risk associated with higher mileage and older vehicles, most lenders will have age and mileage restrictions, which could result in higher interest rates. In some instances, the lender may not fund the vehicle due to the associated risk.

Lender Policies and Additional Factors

Interest rates depend on several factors, but each lender has unique guidelines. Some may require six months of employment, while others can help from day one. There are also lenders who specialise in older cars, new cars, bad credit, higher loan amounts, and higher LVR ratios.

Other factors come into play with different lenders, and Moneysmart provides helpful insights on what to look for when shopping around. Be sure to check out Moneysmarts article called “Car Loans” for more information.

How We Can Guide you to the Best Deals on the Market

Fox Finance Group can assist you in finding the best deals on the market. By doing the heavy lifting and legwork of comparing 50+ lenders and their hundreds of options, we can help you find not only the best deal available, but also the deal that meets all your needs, without impacting your credit score.

Ready to take the Next Steps?

Get started today with our quick and easy online application. Prefer a chat? Give our friendly team a call at 07 3505 3099, and we’ll get the ball rolling for you. Want to know more about who we are? Head to our meet the team page and put a face to the name!