Know How Does Car Loan Interest Rate Works?

When you are out to search for an affordable car loan, it’s important that you know how auto loan interest rates are calculated by lenders. There may be a number of factors which lenders take into account for determining the type of interest rate which can be offered to a borrower. Some of these include:

• Credit history of applicant
• Simple or compound rate
• Amount of down payment
• Ability to provide co-signer
• Total amount of loan being sought
• Borrower’s Debt-To-Income ratio

How Auto Loan Interest Rates Are Calculated?

• Credit Rating
  The most crucial parameter that affects the overall affordability of car loan interest rate is the applicant’s exact credit status. Most of the lenders run credit checks to verify borrowers’ past debt repayment histories. To that effect, if you have a good credit score, you could be eligible for lowest interest rates but if your credit is subprime, you can expect the interest rate offered to be significantly higher.
• Types of interest rate
  As mentioned earlier, interest rates could be of 2 different types-simple and compound. If it is simple interest rate, you will spend less money on interests as compared to a loan with compound interest rate.
• Debt-To-Income ratio
  DTI is a ratio that helps lenders to know the amount of money being spent on debt payments like housing instalments or credit card payments and food every month from borrower’s monthly income. Currently, majority of the lenders will approve your auto loan request if your DTI ratio is around 28/36.

Getting the Best Car Loan Interest Rate

• See if you can qualify for special car financing rates
  When shopping for new or used car, you will realize that car makers provide special interest rates for financing of the cars being promoted. You must get an idea of these special auto loan rates by talking to some competent local expert or by doing some research on the subject on your own.
• Check existing interest rates provided by various banks
  Make use of websites like Bankrate to find out the level of interest rates which is being offered on loans for financing new or used cars by loan dealers. This is in case; manufacturers do not approve you for special car loan interest rate.
• Ask for the “Buy Rate” when exploring multiple alternatives
  Car makers offer financing to new and used car dealerships at “Buy Rate”. So while finalizing a deal, make sure you demand this rate.