4 Things Lenders Look at to Decide Your Interest Rate on an Auto Loan

4 Things Lenders Look at to Decide Your Interest Rate on an Auto Loan

Congratulations, you are ready to buy a car. Like most people, you probably don’t have all the cash to buy a used car out right, and that’s fine. Fortunately, almost all automotive dealers offer the convenience of one-stop shopping with on-site financing. Most used car dealerships work with about five to 10 different banks or finance companies so that they can offer competitive deals to their customers.

When it comes to financing, you unfortunately are not guaranteed a loan, or at least one with a good interest rate. There are a lot of things that the lenders look for when you are shopping at dealers of pre-owned vehicles, and here are some of those things.

Credit score

Your credit score is a numeric score that represents how well you can borrow and pay back money. Your payment, default, and debt histories are included in this score. Lenders can use this score to determine your financial reliability and responsibility. Typically, the higher your credit score, the better (lower) your interest rate will be.

Length of the loan

Lenders typically assume that if your loan is shorter, your ability to pay is less likely to change over the life of the loan. They also assume that they will be getting their money back faster, so the interest rate will probably be lower.

Down payment

How high your down payment is can help the lender determine the risk they are taking by lending you money. The more money you put down, the less they have to lend you. Therefore, the less risky you are. It’s then safe to assume that the more you put down, the lower your rate will be.

Debt to income ratio

This ratio is determined by your monthly payment obligations to your income. Taking on an auto loan will increase your monthly payment obligations, so the lender wants to make sure your income ratio will remain at an acceptable level for them to be paid back.

When you’re shopping at dealers of pre-owned vehicles for used cars, the good news is that you will most likely be able to get your loan right on site. Understanding what goes into loan approval and interest rates can help you get the car of your dreams!