Most auto financing companies keep a checklist of the factors that they consider in calculating the car loan rates they offer to loan applicants. These rates eventually affect the amount of payments involved in most loans. In case you decide to obtain a car financing there is a great need for you to understand these factors. Knowing these allows you to determine the payments to expect and help you figure out a realistic budget for the financing. These factors include the following:
1. Credit score
The credit score you own affects the loan rates that you would qualify for. The credit score is calculated based on your credit report. The report includes the record of your previous loans and how you performed in making the payments for such. In case you possess a good credit record, your credit score is probably high which allows you to qualify for loans with lower interest rates. If your credit record is bad, this could also mean that your credit score is low and you only qualify for loans with higher interest rates.
2. Type of car subjected to financing
The type of car that you intend to purchase through financing also affects the loan rates that you would be paying. Purchasing a used car through financing most of the time involves lower interests and monthly premiums. This is because the price of a used car is lower compared to a brand new one.
Financing a brand new car on the other hand might involve higher interest rate and monthly premiums. This is because brand new cars are relatively expensive. Since the price of the car is high, you need to obtain higher amount of loan to purchase this. Thus, you are required to pay more interest.
3. Loan term
The loan term affects the car loan rate. Short term loans involve less interests and higher monthly payments. The good thing in this type of loan is that you can easily own the car by paying the remaining loan balance in a shorter period.
Long term loans on the other hand involve lower monthly payments but longer period to pay the loan off. In this loan term, you are paying greater interest since the loan lasts for a long time.