If you have ever been drawn into a finance application by the allure of ultra low rates then chances are you will have been disappointed with the eventual loan offer.
Lenders and large branded dealerships often advertise the lowest rate possible, except they can be very difficult to qualify for.
The hope is that you become emotionally invested in the vehicle purchase and become less rate sensitive the deeper you get.
What can start as loose promise of a sub-6% rate is now into double digits! Leaving you puzzled as to why?
In this article, we will discuss what can lead to a higher interest rate on your car loan and what you can do about it to get the best rate possible.
Car Loan Lenders Will Price for Risk
Most lenders will offer multiple tiers of interest rates with only the very best customers able to secure the lowest rate possible.
Pricing is a reflection of how likely you are to repay the loan on time and without issue, according to their internal criteria.
The greater the perceived risk, the higher the interest rate they’ll charge to offset potential losses.
Often, the gap between the top and bottom rate can be significant, which is what leaves so many borrowers surprised!
While every lender has their own criteria, and a sliding scale of acceptable thresholds within that criteria, there are some commonalities that we will discuss below.
Factors That Can Increase Your Interest Rate
As we work through the factors below you must ask yourself if this makes you more or less risky as a borrower.
If your profile suggests even a small degree of uncertainty, then you may be bumped into a higher interest tier.
Credit Score
Your credit score is often the first hurdle to finance eligibility with most lenders, and will often see you placed into different price tiers based on this alone.
To qualify for the lowest rates on the market you may need a score upwards of 800, and meet a long series of other criteria.
But the credit score threshold is step 1!
While there is no minimum credit score required to qualify for a car loan with a small number of non-bank lenders.
A low credit score will make it hard to get a rate below 10% anywhere, and in some cases you may struggle to get under 20%.
However, as you rebuild your track record then it could be possible to refinance to a lower rate after 12-24 months.
So you have to play things smart if you have had significant credit problems in the past.
Credit File Activity
Speaking of significant credit problems, the details on your credit file can say much more about your profile than the score alone.
If you have frequent applications for things like payday loans this looks very bad.
Payment defaults listed for unpaid loans is also a major negative.
Other things like semi-frequent missed payments, a surge into applications for various credit products, they can all be signs that your finances are not being well managed.
At the other end of the spectrum we have nice consistent repayments being made on a manageable number of credit products over the long term.
The difference in risk profile is huge and you will be priced accordingly.
If you would like some feedback on the current state of your credit file and how it may impact your loan eligibility then click below and our expert team will be in touch.
Residential Status and Stability
There are multiple elements to this that a lender will consider.
- Whether you are a home owner, renter, or boarding.
- The length of time you have been at your current address.
- If you are living with other adults and sharing the expenses.
A long term renter or home owner will appear much less risky than someone who moves house every few months.
Sharing the bills with a spouse can also present as lower risk… Bad luck to all the single people out there!
Income Source and Stability
Your source of income is another factor where the status of your employment and length of time you have held the same job can be important.
While there are now lenders who will lend to full time and casual employees after only one day of employment, your options will be much less in these cases.
And your interest rate is likely to be pushed higher.
When you compare this to a long term employee who has been with the same company for 10 years and the same industry for 20 years, you can see the difference from a lender point of view.
Where things can get interesting is if you run a small business or own a company.
There is a whole other category of commercial finance available where the rules are very different.
Low-doc loans are possible and can be approved in quick time with minimal criteria. You can learn more about loans for the self-employed here.
Income Amount
In addition to the employment type, a lender will also have thresholds for your level of income.
This factor is very black and white. In order to qualify for certain tiers you must earn above a set amount.
This one is easy to understand – the more you earn the less risky you are. But of course, this is all relative to how much you are borrowing.
However, whether you can meet your loan repayments is a calculation done to see if you get the loan at all and not necessarily related to the interest rate you will pay.
Bank Statement Activity
Most loan applications we submit do not require bank statements.
These are only required when there is a compelling reason for a lender to take a closer look at how you manage your money.
If you have a low credit score or recent payment defaults on our credit file then you may need to show 90 days of bank statements so a lender can assess your financial habits.
This is a big positive for those who have improved their financial discipline and are just waiting for their credit score to catch up!
It can also help you get a lower interest rate than your credit file may suggest is required.
Positive transaction patterns:
- Controlled discretionary spending
- Account balance stays at a healthy level throughout the pay cycle.
- Consistent income
For those that demonstrate poor bank statement activity then you probably won’t be approved at all, and may need to tidy things up and try again.
Negative Transaction Patterns:
- A balance near zero soon after payday
- Frequent ATM withdrawals
- Gambling transactions
- Wage advance deposits and repayments
- Payment reversals
License Category
Not many lenders consider your license status and are happy to lend to anyone who has a provisional license or higher.
However, a small number of lenders will consider those who still have their learners permit.
The rate will be higher though as they are often confined to the highest risk tier no matter how good the other factors appear.
This is another scenario where it could make sense to refinance after 12-18 months and you have graduated to your full license.
Vehicle Seller Category
It may surprise you to learn that some mainstream lenders will not finance a vehicle that has been bought privately.
And if they do, they may add on an additional fee that can be upwards of $600!
Considering that most will buy privately to get a better deal on a purchase you may find some of this benefit is eaten up by additional fees or higher rates.
We always encourage our customers to buy from a licensed dealership so they have the legal protections including compulsory warranties, roadworthy certificates, registration, and more.
A dealership also has a vested interest in providing a good experience for their customers and building their brand reputation.
The lender has a stake in this with the asset being used as collateral to secure the loan. So they will price your loan accordingly.
Asset Quality
A better quality asset means a larger resale market, which in turn lowers the risk for the lender.
So there can be a big difference in rates offered on new and used cars.
A new car will have less variance in the wear and tear over the life of the loan, and will also have a manufacturer’s warranty to cover basic problems.
Combined with the larger pool of buyers if a quick sale is needed and you can see why lenders like newer cars.
Used cars will not always result in a higher interest rate though.
It will be heavily dependent on the type of vehicle, the age of the vehicle, and the kilometres on the clock.
Vehicle Usage
If you plan to use the car for business, ridesharing, or delivery work,then the loan could get bumped into a commercial category.
As discussed earlier, this is a whole other set of rules (and interest rates!).
The dominant purpose must be personal for you to qualify for a consumer car loan.
If you are not sure if you qualify then start a conversation with our expert team by filling out the form below.
What if I am Already Locked Into a High Interest Car Loan?
If you feel that your credit profile warrants a better rate and you were a bit naive when initially signing up then the good news is you can take action now.
You can always refinance a car loan and move over to a better deal.
However, if you had some credit problems at the time of application then your ability to improve your rate depends on your financial behaviours since.
By making all of your repayments on time your credit score may have improved significantly.
Car loans usually have 5-7 year terms, but you may be eligible for a lower interest rate in as little as 12 months.
So consider refinancing if you have been doing all the right things. You could save thousands by doing it early!
Conclusion
All of the factors discussed have a clear pathway to improve how you present to a potential lender.
You may be surprised how quickly you can qualify for a better interest rate.
But you need to know who will be the most accommodating for your current circumstances, and this is where having a strong broker in your corner can make all the difference.
So get in touch with the team and see what rates you may qualify for today!
