Each and every lender will use a different formula for how they determine what interest rate you can obtain on your proposed car purchase, so it may be a good idea to speak to a Finance Broker with a range of lenders and products to ensure you obtain the best overall deal for your own circumstances.
Credit History
Your credit history can play a major role in determining the interest rate you will receive. Each and every time you apply for credit, whether it is a loan, a utility or telephone account, an enquiry could be made on your credit file by the company offering you credit. Your credit file will be reviewed in regards to how many enquiries you have made in a certain amount of time, and if there is any adverse information in your file, such as paid or unpaid defaults, court judgments or bankruptcies.
But your credit file is only one part of the story. A financier could also review how long you have been in your employment and residence, or how many different employers and residences you have had in a certain period of time. This can help them gauge your stability as an applicant.
Affordability
They will also look at your net worth, which is your overall assets versus your liabilities. Any property equity is a big scorer when determining your interest rate. A good savings history with some cash in the bank also will help assist obtaining a better interest rate. Your overall income versus expenses and how much surplus would be left after your proposed car loan repayment will also be reviewed.
Past checkable car loans as a reference will also assist in achieving a better interest rate, as an experienced borrower with good past history will be deemed less risky than a first time borrower, or a borrower that has had an average previous loan history. This is why it is always crucial to conduct your loans perfectly, as the more history you have, the better chance of obtaining yourself a better deal the next time you borrow, essentially saving you money.
Vehicle
Of course the vehicle you are proposing to purchase will have a big effect on what interest rate you will achieve. A brand new car purchased through a dealership is a less risky lend, than for example a 9 year old car being purchased through a private seller. The amount you are borrowing against the vehicle will also come into account. It’s always best to have a deposit, if you were to borrow the whole amount, or borrow other costs such as on road costs or finance shortfall from the previous finance of your trade in you could find yourself with a higher interest rate.
What it basically comes down to is how much risk the lender perceives to be taking on, with both the vehicle and the applicant. Not all lenders work on a “rate for risk” environment, but their lending criteria will determine as to whether you would be approved for what interest rates they have available.
This is why a good Finance Broker can guide you through this maze. They will understand each and every lender’s policies and guidelines and apply for the best loan for you first time, without making too many enquiries on your credit file, which could make your interest rate higher.