Interest is an unavoidable cost you’ll need to account for when applying for a car loan. Getting the lowest interest rates is worthwhile, as it can add up to thousands of dollars extra over the life of your car loan. Interest rates can change, and the rate you get on your car loan will depend on numerous factors.
When applying for a car loan, your credit score will get checked, so it’s worth understanding the impact it can have on your loan and interest rates.
How credit rating affects interest rates
Your loan rates can be influenced by several factors, such as your credit rating, income, debts, loan amount and loan term.
Your credit rating measures your creditworthiness, which is a key factor in determining your interest rate. It indicates to lenders whether you’re reliable at paying bills on time and paying back money borrowed.
Interest allows lenders and banks to limit risk. The level of risk you represent to the lender will be partly measured by your credit rating. Some lenders may view a bad credit rating as a sign that you’re not a reliable borrower, and therefore pose more risk to them in lending you money.
The better your credit score, the more likely you are to get lower interest rates on your car loan. If a bank thinks you’re more likely to default on a loan, they will charge higher interest to recoup more costs from you early on.
How much interest will you pay on your car loan?
As interest rates are based partly on your credit score, the better your credit rating, the lower the interest rates you may be eligible for on your car loan.
How much interest you’ll pay can vary from lender to lender, and will also differ for each person, as the interest rate is dependent on numerous factors specific to your situation. As well as credit rating, loan amount and loan term can impact how much interest you pay.
A lower interest rate can save you a lot of money, as less interest is added to your monthly payments. In some cases, it may be best to build your credit rating before applying for a car loan.
A car loan calculator is a helpful tool for getting an idea of how much your interest may be, however, these tools do not take into account your credit rating and personal circumstances, so the amount may not be accurate. A finance specialist will be able to assess your credit rating and the type of loan you’re after. They will provide you with a clearer picture of the interest rate you will pay on your car loan.
What can you do if you have a bad credit rating
If you have a bad credit rating, it can negatively impact the interest rate on your car loan, however, don’t worry, there are some things you can do to improve it.
Your payment history impacts your credit rating so paying your bills on time and avoiding missing payments can help improve your credit score. Set up automatic payments to make it easier to keep on top of all your regular bills.
Don’t overuse your credit card. Stay below your credit limit and pay off your balance each month. Whether a credit card or personal loan, reducing your debts is a good step toward improving your credit.
If you have a bad credit rating, you can still get a car loan, you’re just likely to pay higher interest. Improving your credit rating may help you save money on the overall cost of your loan, so it’s worth considering whether you should spend the time doing it before you apply for a car loan.
Working with a finance specialist can make the process of applying for a car loan easier. They will compare rates offered by various lenders and banks to find the best option, and rates, for you. Contact the team at 360 Finance to get started on your next car loan.