How is the Interest Amount Decided on a Vehicle? Here’s How Interest Rates Work for Car Loans!

February 21st, 2022 by

If you’re planning to buy a used car, chances are that you’ll be needing a car loan.

If this is your first time asking for one, there’s something you should know beforehand. Fulfilling your end of it involves more than just repaying the amount you initially asked for. You also have to pay a certain “commission” known as interest rate.

However, interest rates are rarely a constant figure. Instead, their respective sizes per-loan change based on many factors.

To give you a better understanding of the situation, we’ll be going over some of these things. That way, you’ll know why your interest rates are (or will be) the way they are.

Your Current Credit Scores

Credit scores are an essential part of it all because they reflect your prospects for clearing debt.

If your scores were to show good credit, lenders will assume that you can manage well enough. But if they were to show bad credit, the same lenders will assume that there are going to be a few bumps in the way.

If you fit into the second category, rest assured that you’ll have to compensate for all potential delays, even if you don’t run into any of them. As long as you have bad credit scores, your interest rates will remain higher than those of a buyer with good scores.

Luckily, the opposite also applies. If your credit scores are good, you’ll be dealing with lower interest rates for the entire loan.

Your Lender of Choice

The person or institution that you ask for a loan is also an important part of the process.

For instance, credit union car loans ask for lower interest rates (on average) than if you were to ask a bank directly.

Alternatively, many auto dealerships like House of Cars offer their own car loan services. In such cases, it is not odd to find one that runs great offers you won’t see anywhere else.

There’s a wide array of possibilities you could take advantage of. Make sure to research them all and find whichever suits you best.

The Length of Your Loan

For the most part, lenders want you to fulfill your debt as quickly as possible. This is one of their top priorities.

With that in mind, they’ll also be raising your interest rates if you ask for a long repayment term. This remains true even if you’re running great credit scores. Again, this is a measure to compensate for any “unavailable money” they’ll have to deal with once they approve your loan.

It is worth mentioning that longer terms do result in smaller monthly payments. But they’ll also result in a larger total because of the elevated interest. Worst case scenario, you might be owing more than the vehicle’s long-term value.

In essence, you should pick a length that allows you to make affordable monthly payments, but do make sure that it doesn’t harm your finances in any way.

The Current State of the Market

When coming up with an appropriate interest rate, lenders also take inspiration from the current state of the market.

Is everything working as intended? Then there shouldn’t be any problem. They’ll just base themselves on the points mentioned above.

Is there any crisis that’s currently affecting your lender? To name an example, what about a storage crisis?

Well, then they would have to compensate for that as well. As in, they’ll have to raise your interest rates to keep their services afloat.

Depending on your situation and the state of the market, it could prove useful to prepare for elevated costs. Likewise, it might serve to wait until a given crisis comes to a stop. If that’s the case, you can resume your purchase once things go back to normal.

Still on the Lookout for a Car Loaner? Try House of Cars!

By now, you should know what to expect when asking for a loan. At least when it comes to the amount to be paid afterward. However, that does leave a question to be answered: Where will you get said loan?

If you’re currently set on Lethbridge, you can’t go wrong with one of the best auto dealers in the area! That’s right, we’re talking about House of Cars Lethbridge!

Our mission has always been to make drivers meet with the vehicle of their dreams. And for those reasons, our services have been tailored to deliver the most complete and efficient experience.

Likewise, we pride ourselves on offering our services to everyone, regardless of credit history. Are you currently dealing with bad credit? To us, that means nothing! You still deserve to drive a good car!

You only need to contact us, and we’ll get started right away. Visit our website today to learn more!

Posted in Finance