6 Hidden Factors that can affect your Car Loan Interest Rate

Getting a car loan and fulfilling your ambition of owning your dream car is easy in today’s world. There are many options available like banks, car dealerships, or other lending institutes which are willing to give you a loan as long as you fulfill their criteria. Mainly they check your credit score, employment history, income sources, etc., and based upon this they approve your loan at an interest rate. There are various factors that determine the interest rate on your loan. 

In this blog, we will share six hidden factors that can affect your car loan interest rates.

Let’s jump in!

  1. Debt to Income Ratio 

Debt to income ratio is the ratio of monthly debt (mortgage payments, loan payments, etc.) to your monthly income (salary, pension, rental income, etc.). Lenders see this ratio and figure out that you are a valid candidate to qualify for a loan. Debt is the main thing that affects your credit card score directly. That’s why you need to cover your debt first. You can get a loan until your next payday to cover everything before getting your car loan.

Example – If you have credit card debt of $150,000 and your monthly income is 30,000$, then lenders are unlikely to give you approval for the loan. Even if you qualify for the loan, then the interest rate of that loan will be high and eventually, you will suffer. 

On the other hand, if you never had a mortgage loan history or credit card payment history then the lender will be unwilling to give you a loan. The reason for this is that they are not able to figure out how reliable you are for the monthly payments. Managing your debt will be helpful in the foundation of good financial health and saves you from future money problems. 

Maintaining a good debt to income ratio will be helpful in getting approval for loans from banks, used car dealerships, etc. A good debt to income ratio varies from 28 percent to 36 percent. 

Here are some steps that you can take to lower debt to income ratio:

  • Increase the monthly payment because this will help you in lowering your overall debt. 
  • Avoid taking more debt in future. 
  • Postpone the large purchases from your credit card. Instead, save money and then try to make as much downpayment as possible during purchase of the product. 
  • A decreasing DTI ratio will be a motivating factor and you are able to manage your debt more effectively. 
  • Maintaining a good credit score by paying your installments on time. 
  1. Age of the Vehicle 

The age of the car you are looking to buy directly affects your auto loan interest rates. However, the variation of interest rates with age is different for different vehicles. 

To understand this concept let’s see how the car loan works. First, you contact a lending company and apply for a car loan. If the lender agrees to give you a loan and the car you bought acts as collateral. If you failed the monthly payments then the lender will seize your car and get back the debt money. 

As we know, the value of the car depreciates with time. So, the lenders also take into account the depreciation risk and due to this, they may charge slightly higher interest rates. 

New cars are more prone to depreciation as compared to used cars. The value of a new car depreciates by 25% at the end of one year. So, to compensate for this risk they charge more interest rates on new cars as compared to old cars. The best rates are available on models which depreciate slowly and have high resale value. 

Approved Auto Loans provides hassle-free approval of car loans at affordable interest rates. So, if you are looking to finance your car then visit our website. 

  1. Employment History and Profession

The employment history plays a vital role in determining your interest rates on a loan. The lending institution wants to know whether you have a fixed source of income like pension, salary, or other sources to repay the debt.

 The lenders even ask for your bank statement as proof of your income or employment. 

If your employment history is not good or you are being fired many times then the lender may hike the interest rates as compared to normal rates. 

The profession you are in determines a lot about the interest rate. The doctors, lawyers, Chartered Accountants, etc. with stable jobs have higher chances of loan approval as compared to a person working in a place like a restaurant, cafe, bar, or in other words, have low-paying jobs. This may sound like discrimination but lenders usually take a closer look at your profession and financial background before giving debt. 

  1. Relationship Status 

Here I am not talking about your Facebook relationship status but your actual relationship status whether you are married or unmarried. The lenders usually charge a low-interest rate to couples having stable employment history because if the borrower fails, he/she has someone to support financially. The job profile of your better half also matters here. 

If you are single then the lenders may charge you a slightly higher interest rate. To avoid this you can take out a loan on your parent’s credit score but that doesn’t mean they are paying for your car or you mess up their credit score by irregular payments. You have to be responsible and plan your finances in such a way that the monthly installments will not be a burden. 

  1. Home Ownership

Homeownership also plays an Imperial role in the approval of your auto loans. If you have recently taken out a mortgage on your home then lenders may not be willing to give you a car loan. Having said that, if you are an owner and have paid all your installments at the proper time then your chances of loan approval are high. Owning a home provides more stability than renting. 

  1. Economy 

Unlike other financial products, car loans are also influenced by the economy. If the economy is strong, which means people are earning well and spending money in the market. In this case, the Bank of Canada hikes the interest rates and lenders also increase their interest rate accordingly. 

When the economy is in a downturn,  then people are spending less, so the Bank of Canada decreases their interest rates. In addition, lenders also lower their interest rates. 

If these six factors are in your favor then your chances of getting a loan are 100 percent. Not being able to qualify for these factors causes a hike in interest rates as it is more riskier for the lender to provide you a loan. 

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of

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