Before you are out to apply for a car loan it is important for to know how car loan interest rate works. It will help you to understand the entire gamut of car financing as well as what to expect from lenders when exploring various options that are available at your disposal.
AutoLoansForEveryDriver can help you to learn the basics of auto financing through a totally simple, easy and hassle-free process.
The way in which car loan interest rates are calculated by lenders is a subtle process. However, the following factors assume significance as they provide lenders with detailed information about an applicant for determining interest rates that can be offered.
Credit history : The existing status of borrower’s credit rating is the most crucial parameter when it comes to calculating auto loan interest rates as it tells lenders whether a probable apppcant will be able to pay back the auto loan or not.
Types of interest rates : Usually, there are two types of interest rates charged by car finance lenders – simple interest rate and compound interest rate.
Debt-to-income ratio : DTI ratio is another vital factor which can play a pivotal role in calculation of interest rate charged by lender.
Commonly, simple interest rate is charged by loan dealers for providing loans with shorter durations to borrowers for purchase of new or used cars. They are calculated by using principal loan amounts.
Calculation of compound interest rate can be a complicated task as it will take into consideration principal loan as well as simple interest rate on a monthly, quarterly, bi-annual and annual basis.
The level of interest rates provided for buying used cars could be at great variance with those offered for purchasing new cars. There could be a number of reasons for this. Soem of these may include the below mentioned aspects.
It could be easier for you to qualify for the lowest and best auto loan interest rate for your specific financial and credit circumstances if you follow the below steps.