Nothing beats the feeling of stepping into a new car. But, the buying process itself can be a massive undertaking. Beyond the price tag is a number of decisions to make about trade-in value, add-ons, warranties and auto financing.
Getting the lowest rate and knowing you’ve received the best value is ideal. However, the road to get there isn’t always the easiest. Our team at WEOKIE receives a lot of questions regarding what determines the best rates. So, in today’s blog, we’ll be shedding light on 12 credit union factors that affect your auto loan payments.
How Car Loan Rates Are Determined
The logic behind auto loans is fairly straightforward. What it boils down to, is the level of perceived risk to the lender. When a credit union, bank or dealership provides you money in the form of a loan, they’re taking on a bet of whether you’ll pay that money back.
If the odds are in their favor, they’re likely to accept a smaller rate on the loan. But, if there’s a chance that you won’t pay back the loan, the lender will want to charge a higher rate as compensation for taking on the increased risk.
Perceived risk isn’t the only thing that affects your auto loan payments. In fact, lenders evaluate several factors like financial health, payment history and debt obligations before extending an offer. Let’s take a closer look at these 12 factors and what they mean for you.
12 Credit Union Factors That Affect Your Auto Loan Payments
1. Credit Score
A credit score is a numeric indication of a borrower’s creditworthiness used to gauge financial responsibility and reliability. Your score can be affected by payment timeliness, the number of open credit lines and age of credit. Some other factors that may affect your credit score include:
- Payment and default history on revolving debt obligations
- Ratio of revolving debt-to-credit available
- History of collections, tax liens or civil judgments
- Bankruptcies, foreclosures or evictions or
- Disputes, inquiries or denied credit
It’s wise to keep in mind that the single biggest factor in determining your auto loan payments will likely be your credit score. Knowing this number allows you to come to the table, prepared for negotiation.
2. Loan-to-Value Ratio
Your loan-to-value (LTV) ratio is the amount you’re borrowing divided by the value of the car you’re purchasing. The lower the ratio is, the less risk the lender is accepting. If you have an exceptionally high LTV, you may consider providing a heftier down payment to reduce the rate you’re being charged by the lender.
3. Debt-to-Income Ratio
Your debt-to-income ratio is a simplified way to measure your ability to repay a lender. Owing a lot of money in outstanding debts could risk your perception as a reliable borrower — resulting in less than stellar terms.
Just remember, the more income you have available, the more confidence the lender will have that you’ll pay them back. If you have a fairly low debt-to-income ratio, you may even be rewarded with more competitive terms.
As we mentioned in the LTV section, willingness to place a substantial down payment can positively affect your auto loan payments. Most down payments are small compared to the overall purchase. But, the more money you can put down, the more equity you’ll have built into the vehicle. Thus, the more power you’ll have to negotiate a better interest rate on the auto loan.
You’ll also find that credit unions, banks and dealerships can be swayed by your commitment. Paying a significant portion of your auto loan signals to a prospective lender that you can and will pay off your loan in a reliable manner.
5. Age of Vehicle
Loans that are given out for used cars usually come with higher interest rates compared to new vehicles. This may seem a little backward, but makes sense considering older cars have already depreciated in value. Additionally, dealerships have less to gain by selling less expensive cars using shorter loan terms.
6. Length of Term
The shorter the term, the quicker the lender can expect to receive their money — and the better your interest rate will be. Extended terms with lower payments may be attractive but you’ll actually be paying more money over the life of the loan.
If you need to lengthen your repayments to provide some cushion, please do so! Just keep in mind, you’ll pay a higher interest rate for the convenience. Before heading to the dealership, give our experts a call and see what WEOKIE Federal Credit Union can offer you going into the transaction.
7. Lender Cost of Funds
Another factor that affects your auto loan payments is the cost of the funds to the lenders themselves — or the amount they’re paying for the money they intend to lend. You’ll encounter this most often with dealerships. Unlike credit unions and banks, they don’t have spare cash lying around to lend to customers. This results in some of the highest markup and interest rates in the market.
8. Dealership Profit Models
As we mentioned, credit unions and banks have stronger, more reliable lending power than dealerships. Their business model is to profit on the margin between the rate they’re paying to borrow the money and the rate they’re charging customers to use it.
The rates dealerships charge can fluctuate based on the rates they pay and the amount of capital available on these credit markets.
9. Economic Health
Generally speaking, when the economy is doing well, businesses earn more money than they had intended to spend. Rather leaving it in a bank account, businesses will invest it in financial instruments that yield a return. If this spare cash makes it way into the credit market, the credit supply available will increase — which lowers consumer lending rates.
10. Market and Capital Demand
From what we’ve seen in history, when the economy is doing well, consumers tend to purchase more goods (like cars). When the demand for these goods increases, the demand for credit increases. This can cause lending rates to increase as a result.
11. Monetary Policy
Monetary policy describes the actions the federal government takes to control the money supply, interest rates and levels of inflation in the economy. The U.S. Federal Reserve sets a rate called the “federal funds rate” which determines the interest rates banks charge one another for loans of reserves.
Inflation is the rate at which prices increase within an economy. Lenders typically charge interest on loans to counteract the inflation. This ensures they have enough money if the economy is experiencing an uptick in its federal funds rate. All to say, lenders are more willing to set lower interest rates while inflation is low.
There are numerous factors at work that move the needle of your auto loan
If you’re thinking about purchasing a car, be sure to check your credit score, your debt-to-income ration and consider a vehicle that keeps your LTV (Loan-to-Value) at a reasonable percentage. Knowing your financial health and working to improve these numbers could save you a considerable amount on an auto loan when you’re ready to apply.
To learn about WEOKIE’s auto loans and how we can arrange payment terms that best fit your budget, give us a call at (405) 235-3030 or 1(800) 678-5363 to speak with a lending specialist today!
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