It costs money to borrow money. The price tag for borrowing money over time is known as the APR (annual percentage rate), also known as the interest rate, finance charge, or the cost of money.
Unlike the price of a car which is negotiated with a dealer regardless of credit, the APR is determined by a lender based on your financial history -- your repayment record, the amount of debt you currently have, your down payment (if any), the term of the loan (how long it will take you to repay the lender), and in some instances, the vehicle itself, whether the manufacturer is offering low APRs to sell more of certain models.
Your Credit Score
Most people know that the higher the credit score, the lower the interest rate you'll get. That works in the opposite direction the lower the credit score (the higher the APR). While the APR can be negotiated, your negotiating power will depend on your score.
To give you an idea what APRs correspond to FICO* scores, here is a chart from FICO* of the national averages as of October of 2017. The average in your state may vary.
Credit Srore Range APR
720 - 850 3.719%
690 - 719 5.071%
660 - 689 7.139%
620 - 659 9.882%
590 - 619 14.135%
500 - 589 15.297%
A good DTI (Debt-to-Income) ration can lower your APR. Lenders use DTIs to estimate your ability to repay the loan. Your DTI is simply your monthly debt obligations (including loans, utilities, rent, credit cards, etc) divided by your monthly income. If you currently have very little left at the end of the month after paying these obligations, a new auto loan could bring you to the tipping point -- a risk that a lender protects against by charging a higher interest rate. Some ways to improve your DTI would be to pay off some credit cards or pay down some loans.
Your Down Payment
Making a sizable down payment on your auto loan can also get you a lower APR. By putting more down, you become a lower-risk borrower because you have your own money in the car and therefore less likely to default. You are also less likely to owe more on the car than it's worth.
The Loan Term
These days it is quite common for dealers and lenders to offer long term car loans up to 72 months ( 6 years) or more. What most people don't realize is, long term financing will cost more than short term financing. The reason: 1) It takes longer for the lender to be paid back its principal, and 2) You have more time to default (a lot can happen in 5-6 years!). A short loan term means that a lender gets its principal back quicker. For that, you'll be rewarded with a lower APR.
Buying a new car will get you a better interest rate that a used vehicle. A lender can easily determine the value of a new car, but a used car's value will vary widely based on mileage, age, wear-and-tear, and maintenance. A used car is likely to be a riskier loan, so the lender compensates by charging a higher interest rate.
Also, manufacturers frequently offer low APRs to incentivize buyers to take home certain models as part of their sales push for the month, the quarter, or the year's end.
There is no such thing as equal opportunity lending! Just because interest rates are at an all-time low, doesn't mean you'll get the lowest, or even a low rate. Remember that lenders will work with you, but only within the parameters set forth by their analytics based on your payment record, income, debt load, and credit score.
4448 Eagle Rock Blvd
Los Angeles, CA 90041
BY APPOINTMENT ONLY
Copyright 2018 Caritela LLC