The most common question we are asked as a finance brokers is, “what is your interest rate?”
This is always a fun question for our brokers, as its practically impossible to state an interest rate without first understanding the client, their needs, the vehicle they would like and their past credit history. This is because car loans are not sold in the same way as mortgages, where it’s common to see the rate posted up in the front window of your local bank. Car loans are sold on an individual basis, where everyone gets a rate most suited to their personal profile.
Age of the Vehicle
Some lenders apply their interest rates on the age of the vehicle and not much else, and others may use a “rate for risk” scoring system, where your application will be reviewed in light of your credit history, income, and other factors. This would mean a full application would be required to determine the interest rate you could be offered on your loan. While this can make it harder for customers to shop around to different finance companies, you often end up with a better rate overall compared with a flat rate based on vehicle age for all applicants.
Fixed Term Loans
Interest rates from the main lenders in the motor finance sector are commonly fixed for the term of the loan, which would means that they won’t move up or down with the market and your repayments and interest rate will stay the same throughout the whole loan term.
Some of the best interest rates in the market could be similar to what the average 5 year fixed rate on home loans would be at the current time, but these would usually be reserved for strong applicants with good past borrowing experience and a good asset position.
Loan to value ratio
The amount you borrow can also impact your interest rate. Applicants with a large deposit can help reduce the risk for the financier by reducing the financed amount. This increases the chances that the financier will be able to recoup 100% of the loan amount if they had to repossess and sell your vehicle after a default. Unless you really need a new car now, it’s best to try and save a 10% deposit so that you only have to borrow 90% of the cars value, helping reduce your loan to value ratio, risk, and in the end, interest rate.
Although car loans are usually a lot easier to obtain approval on than a home loan, each and every lender has their own unique way of determining the interest rates available and this can make it all very daunting for the borrower. Good professional brokers should be able to break this down quite quickly as they should understand the lender’s policies and which option would best suit each individual application.