When you're in the market for a car loan, everyone wants to get a low interest and a good deal. There are quite a few different factors that all determine the interest rate that you receive, one of these factors is your credit history.
Here is an introduction to how interest rates are determined by lenders and tips for getting a lower interest rate.
What affects your interest rate?
Each lender will have their own policies and formulas for determining the car loan interest rate that you will receive, so there are no hard and fast rules for determining interest rates.
Generally speaking, lenders will try to determine the overall level of risk involved in lending to you, and this will affect your interest rate. Some of the things they might look at when determining your risk include:
- Employment and residential history
- Financial records and credit history
- Income and net worth
The specific aspects of your situation that a lender will look at, and the importance they place on each one, will depend on their policies.
It's important to note that not all lenders have risk-based interest rate pricing, however, your level of risk will determine whether you meet their lending criteria for the interest rates they have available.
How your credit history impacts your interest rate
One of the most important parts of your application is your credit history. This is because credit reporting agencies, such as Veda Advantage, keep a record of all the information that will be relevant to lenders when they're making a decision.
Your credit history is one of the things that lenders look at to determine how much risk they are taking on by lending to you. If your credit report shows that you have good credit, they are more likely to be confident in your ability to repay the loan, and you will likely receive a lower interest rate.
If you have bad credit, lenders are more likely to charge a higher interest rate since they will want to offset their financial risk by taking more in interest payments. Lenders also will not approve a loan that is unsuitable for you or will put you in financial hardship. So you are more likely to get approved for a lower loan amount if you have bad credit.
Other important factors
Along with your credit history, there are other factors that will also determine your interest rate. You'll have a bit of control over some of these, while other are completely external.
Some of the other determining factors include:
Official cash rate – The Reserve Bank of Australia official cash rate is the interest rate that banks pay or charge when they borrow money from other banks on the overnight market. At the time of writing (July 2016), the official cash rate is 1.75%, this is the lowest rate for some years. When the cash rate is low, banks can typically afford to lend money at lower interest rates.
Loan to value ratio (LVR) – Your LVR is determined by the amount that you borrowed compared to the real value of the car (or other asset). So if you borrow $18,000 to buy a $20,000 car, your LVR will be 80% because the loan amount makes up 80% of the value of the car. A lower LVR is less risky for the lender, so you may get a lower interest rate if you can pay more upfront.
Financial stability – Your ability to repay your car loan will have a lot to do with how secure your finances are. This includes things like your income and expenses, savings, and assets and liabilities. The lender will want to know that you have enough income left over after your regular expenses to pay for the car loan repayments.
How to get a lower interest rate
There are some steps you can take that could help you get lower car loan interest rate. Some of these include:
- Fixing mistakes on your credit history – If you find mistakes on your credit history you can apply to get them fixed. This could reduce the risk that lenders see on your application.
- Maintain good financial practices – Make sure you pay all your bills on time and avoid overdrawing your accounts.
- Pay down your existing debts – Reducing your liabilities, the money you owe to lenders or banks, could reduce the risk associated with acquiring another loan.
Get help from Rapid Finance
At Rapid Finance, we have been helping our customers get a finance that suits their needs for over a decade. We look at your situation in depth and find the strengths of your financial position, and advocate to lenders on your behalf.
Our finance specialists could help you get a lower interest rate on your car loan and guide you through every step of the process.
Find out how Rapid Finance could help with your new car, apply for car finance today.