Do you wish to buy a new car, but don’t have the funds to cover it? Don’t worry. There are a lot of car loan offers out there that will help you get that shiny new set of wheels.
But before you sign up for a car loan at your local dealership or nearby bank, you must understand what interest rates are.
A lot of people nowadays are surprised that they are paying much more than they had hoped for their car loan.
Here is everything you need to know about auto loan rates to help you with your car financing.
#1 What are auto loan interest rates?
Car interest rates work the same as other interest rates that you may know about.
To fully understand how you can manage your car interest rate will help in managing your overall payment schedule. Most car dealerships won’t thoroughly discuss the amount of interest that you’ll be paying by the end of the loan.
They will sugarcoat their package, making it seem like it’s a great deal, but it might be wasting thousands of your hard-earned cash.
#2 Know your credit score
Banks, dealers or lenders use credit scores to decide on whether you are eligible to be given a loan. There is no specific model on which your local banks or dealerships determine your credit score.
There are a lot of credit score models designed for companies, so it would be best if you have your bank tell you what state your credit score is in. There are a lot of factors that affect your credit score, such as:
- Payment history
- Number of credit accounts
- Total debt
- Any records of bankruptcy
In the UK, credit scoring is usually based on the lender’s own models and not the models that the credit bureaus and rating agencies provide.
The crediting bureaus are usually aimed at educating the consumers about their credit rating. Each lender will provide you with a description of your credit score based on their own criteria and the data available to them. As discussed earlier, credit scoring varies depending on the lender’s model used in calculating the credit score.
There are various models used to describe a borrower’s credit score. For example, an Experian UK credit score model is ranged from 0 being the lowest to 999 being the highest.
Lenders will classify the borrower’s credit score into various categories. Most models have five tiers: Excellent, good, fair, poor and very poor. People who want to take a loan with a decent credit score are in the top three categories fair, good, and excellent.
Another model that credit bureaus use to educate consumers is the TransUnion UK credit rating. In this model a borrower with a score of 5 is classified as having an excellent credit rating, 4 indicates a good credit rating, and 3 indicates a fair credit rating. For the lower tiers, 2 is used to classify a poor credit rating and 1 for a very poor rating.
There is a difference between your credit score and credit rating based on the UK models. The credit rating will provide you with an indication of the possible risk that you might pose for lenders. While the credit score is used to determine the chances of your lender providing you with a loan.
#3 How to improve your credit score
There are several ways you can improve your credit score. If your credit was classified in the two lower tiers and you seek to improve it to fall at least in the good classification, you must know what conditions these agencies use as a reference.
Credit rating agencies usually use a borrower’s payment history. Any offenses committed with the payment process will affect your credit score and be written on your credit report for seven years.
You can improve this by having the decency to pay on time. Having no deficiencies in making payments will boost your credit rating, and you will see improvements monthly.
But the best way to improve your credit rating is by reducing the amount you owe overall. If you can manage to pay off your outstanding debt balances, it’s better to do it within three months.
#4 How much are you paying?
Are you looking for the quickest way to get a new car? There are deals such as no deposit car finance, wherein you don’t have to pay a single penny upfront, and you can walk away with a new shiny car.
A lot of packages and great deals such as this are becoming common since manufacturers are looking for a way to draw in more sales because of fierce competition.
You can use an auto loan to cover the payments and look for a great offer with the lowest interest rate. Calculate the amount of interest and finance your monthly repayments.
Let’s say that you want to buy a car from your local dealer, which is worth £22,000. After adding taxes and additional fees such as maintenance, security, and deposits, you are now left with a total of £24,000. That sum will be the amount that you’ll be financing or borrowing.
Let’s say you have good credit, and you sign up for an offer with a 3% interest rate. You also decide that you want to pay your loan within 60 months, then you’ll be paying £431 every month.
How do you calculate the interest? You can use online loan calculators to help you in calculating the interest. You need to type in the required values such as the amount you want to borrow, the number of months, and the rate of interest.
Be mindful of additional and hidden fees that most car dealerships include in their packages. Look for legitimate car retailers and calculate their offers to see if they suit your budget. Don’t hesitate to ask for advice from your financial advisor. They will be of big help in getting your new car roaring on the streets.