Credit Scores, Interest Rates And Length Of Car Loans: All Affect Your Financial Investment In A New Vehicle
If you are considering buying your first new car, you probably have a lot of questions, such as "How does financing work?" and "How long will you have to pay off your car loan?" The answers vary depending on the dealer and your personal credit score. Understanding how they work will help you get the best deal and prepare you for the financial responsibilities as a new car owner.
What Credit Score Do You Need to Get a Car Loan?
Your credit score determines the amount of interest you will need to pay on your car loan. It may also affect the car you can buy. If your credit score is low, you may be limited to a lower amount and restricted to buying a vehicle in a lower price range. If you have excellent credit, you typically get a lower interest rate, qualify for a larger loan and may get a longer period to repay the loan. Credit scores are generally classified in three categories. They may be referred to a tier 1, 2 and 3, level A, B and C or some other designation the car dealer uses. According to Credit Café, a credit score between 800 and 850 is considered Excellent, a score between 750 and 799 is Very Good and a score between 700 and 749 is Good. As a rule, you do not qualify for traditional car loans if your credit score is below 700, but some car dealers have special loans for bad or poor credit.
Who Is the Holder of the Loan?
Some car dealers offer their own financing programs. In this case, the car dealer sets the terms and you make your payments directly to the car dealer. Many later sell the loan to a bank, but your initial paperwork and agreement is issued by the car dealer. If the car dealer does not offer financing, you can get a car loan through a bank or credit union. The bank will set the terms of the loan, and you will make your payments to the bank. When you get a car loan through a bank or credit union, you are free to compare terms from several banks to get the best deal. You may get better terms, such a lower interest rates or extended payment periods from a bank, especially one that you have a positive relationship with.
How Long Do You Have to Pay Off Your Car Loan?
Car loan repayment terms range from short-term loans to extended-term loans. CNBC reported in 2014 that the average car loan repayment term was 67 months, with one in four new car loans ranging between 73 and 84 months. While longer repayment terms may reduce the amount of your monthly payments, it will also increase the amount of interest you pay on your new car, raising the total cost of the vehicle over time. To save money, aim for the shortest repayment terms that keeps your monthly payments within your budget.
How Much Interest Will You Need to Pay?
Your interest rate depends on your credit score and the length of the loan. According to Bankrate, if you have excellent credit you can expect to pay approximately 3 percent interest on a new car purchased in 2016. Rebates and incentive programs may reduce your down payment, but often increase your interest rate for the term of the loan. If your credit rating is lower than 800, expect to pay higher interest rates. Knowing your credit score before going to the dealer and shopping around for the best deal is recommended.
Buying your first new car can be an exciting time, but don't let that get in the way of getting the best deal for your money. Take the time to compare loan terms between several dealers and/or lenders before you make the final deal. For more information, contact a business such as Western Avenue Nissan.