There are thousands upon thousands of car loans out there. All are individual in their own way depending on interest rate or comparison rate, loan term and type of loan – secured (i.e., using your car as collateral) or unsecured. You can even opt for balloon payments (also known as residual value payments) at the end of the loan to reduce your regular repayments. But how can you get the best car loan rate?
Lenders might assess your situation differently
One aspect of the quoting process you should know about is that not all lenders are the same. Some lenders use a “rate for risk” system. Others might use a flat-rate system. Some could use different formulas entirely, based on a range of factors such as new vs. used car purchases, loan terms, and residual value payments or buying privately over dealerships.
Usually, lenders need to assess your risk profile – the likelihood you will pay them back in full and on time. Lenders usually look at:
- The age of your vehicle – older vehicles may carry more risk
- Your employment status
- Your banking history
- If you have a stable residential history – moving around a lot makes lenders nervous
- Your overall financial position in view of your assets and liabilities (debts)
- If you have a deposit or not
All these can influence your lenders’ decision on what car loan interest rates are available to you. Above all, your lender will examine your credit history the closest.
Borrower beware - credit files and interest rates
Your credit history is the most crucial factor in figuring out which rates you’ll be able to get. A simple look at your credit history for defaults or errors may instantly place you into the “bad credit” category, even if your financial situation has stabilised.
Credit histories sometimes contain errors that negatively affect your chances. MoneySmart has a guide on getting your credit history and fixing mistakes.
When you are shopping around for a car loan, state clearly you do not want a credit check done before you commit to pre-approval. A seasoned financial professional should be able to make an assessment without formally checking your credit. More checks on your file make lenders see you as riskier.
What if I have just started a job, or moved in to the area?
As we said before – not all lenders look at borrowers in the same way.
If you are concerned a lender will say you’re a higher risk, find a lender that calculates rates on a flat-rate or incremental rate system. A car finance professional at a broker can help navigate these terms and guidelines for you. Remember, their knowledge is there to assist people into finding the best car loan possible.