How Do Lenders Decide My Auto Loan Rate?

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How Do Lenders Decide My Auto Loan Rate?

Buying a car can sometimes feel like a massive undertaking. Beyond the initial, often hefty price tag, there are a number of stressful and potentially expensive decisions to make about add-ons, warranties and, most importantly, financing. We've received a lot of questions regarding what specifically determines the interest rates on your auto loans. Read on to find out more.

1. Your Credit Score

If you're a Credit Karma member, you probably already realize how important your credit score is to your financial health. When it comes to the long-reaching implications of that special number, your transportation costs are no exception. The single biggest factor in determining your auto loan rate will likely be your credit score, and you should come prepared to any negotiations knowing where you stand.

Lenders use credit scores to gauge your financial responsibility, history and reliability. Your score can be affected by factors like on-time payment history, number of open credit lines, age of credit history and derogatory marks. If you need a refresher on what your credit situation looks like, check out your report details on Credit Karma.

2. Debt-to-Income Ratio

Debt-to-income ratio is a simple and intuitive measure of your ability to pay a prospective lender back. Having a lot of money in outstanding debts could decrease your perceived reliability as a borrower, and result in less friendly terms. The more income you have available, the more confidence the lender will likely have that you will pay them back, and you may be rewarded with more competitive terms.

3. Amount Borrowed and Down Payment

Lenders determine auto loan rates not only by assessing your credit worthiness, but also by considering how much they're going to have to lend. Paying a significant portion of your auto loan via down payment can signal to a prospective lender that you can and will pay off your loan in a reliable manner. Similarly, borrowing an especially large amount of money or offering little or no down payment will up the risk for the lender, probably resulting in a higher interest rate to balance out the lender's exposure.

In basic terms: The more money you can pay upfront for your new car, the lower your interest rates are likely to be.

4. Age of Vehicle

Generally, loans given out for used cars come with higher interest rates than those for brand new vehicles. This may seem counterintuitive, but it makes sense considering that older cars have already begun to depreciate in value. Car dealerships have less to gain by selling less expensive cars, and used car loans often come with shorter terms. These realities make it more likely that a prospective lender will try to recoup some value by considering higher auto loan rates on older cars.

5. Length of Term

Just like with the other factors, lenders will try to hedge their bets when it comes to the length of your term. The shorter the term of your loan, the quicker the lender can expect to get their money back, and the friendlier the terms usually will be. Keep in mind that while a short-termed loan may come with noticeably lower interest rates, your payments will likely be higher and the loan could put relatively more stress on your budget. If you'd like to space the repayments out over a longer time to provide yourself with more cushion, please keep in mind that you'll probably pay a premium for the convenience with higher interest rates.

Bottom Line

Though the process may feel complex, working your way to a good result is often possible. As always, Credit Karma is here to help you with educational resources, including information on long-term trends in interest rates and an advice section full of members with similar experiences. Hopefully, with these factors in mind, you'll be able to go into the negotiation process feeling self-assured and ready.

About the Author: is a Content Writer at Credit Karma. Since joining the team in June 2013, he's been delivering the financial know-how on the daily. When away from work, you can find Mike watching hockey, Twittering for hours and frequenting trivia nights.

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Advertiser Disclosure: We think it's important for you to understand how we make money. It's pretty simple, actually. The offers for financial products you see on our platform come from companies who pay us. The money we make helps us give you access to free credit scores and reports and helps us create our other great tools and educational materials.

Compensation may factor into how and where products appear on our platform (and in what order). But since we generally make money when you find an offer you like and get, we try to show you offers we think are a good match for you. That's why we provide features like your Approval Odds and savings estimates.

Of course, the offers on our platform don't represent all financial products out there, but our goal is to show you as many great options as we can.

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4 Contributions
30 People Helped

Helpful to 29 out of 38 people

This is the most stupid excuse for a rip off I have ever read.  Your credit score determines your ability to pay back a car loan not pay an insurance payment.  This is nothing but a sleazy attempt by the insurerers to raise rates and make you think there is some scientific basis for it.  If this was a car insurance based fee it would have as it's basis the number of wrecks you have had and how many of them were your fault, not your idiotic credit.  Why isn't it based on the phases of the moon, it makes as much sense.  I have a poor score and a great FICO.  I have not driven since 2007 due to health.  Technically I should have no score.  I don't drive and I am not insured.  That is how stupid this is.  I have an idea, why don't we charge insurance rates based upon the schools you went to, or how much cheese you eat in a year, or how likely it is that ISIS catches you and cuts off your head.  Totasl sheer nonsense.   

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1 Contribution
0 People Helped
Helpful to 0 out of 2 people

They are indeed talking about an auto loan. Not car insurance. However, I do agree that car insurance is a rip off. You may have a bad auto insurance score because perhaps you used to drive with insurance and now you don't. To them, you may still be driving but not paying insurance premiums... To them, you don't have continuous coverage and they have deemed you "high risk" if you cared you could probably dispute your score, explain the situation with written proof from a doctor and be on your marry way. But you don't drive anyway so there is no real reason why you should care about a bad auto insurance score in the first place.

1 Contribution
7 People Helped

Helpful to 7 out of 8 people

I have a low score in the Insurance catagory, not sure why,but my insurance is cheap,paid on time

been with only 2 companies in the past 10 years. Paying 30..00 less amonth with the most

recent company,which i have had for 2 years this month. Go figure.

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5 Contributions
10 People Helped
Helpful to 7 out of 8 people

ive been with Tripple A for the past few years and mine is only 820 so I dont get it either. Never late in fact always early payment

1 Contribution
5 People Helped

Helpful to 5 out of 7 people

What is required to qualify for a car dealers 0% auto loans?  Are they really 0% or hidden cost?

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1 Contribution
7 People Helped
Helpful to 7 out of 9 people

There is no hidden fees with a factory zero percent offer.  All that is needed is the credit score they require which is usually 700 last time I checked.  The factories offer these rates when cars are not selling.  This is the best time to buy.  You are getting the use of their money for free.

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33 People Helped
Helpful to 10 out of 11 people


Despite what pamatthew99 says about their being no 'hidden fees', there's no free lunch to be had here.

Let me explain this in as simple terms as I can.

Large purchases such as furniture, homes, and yes even cars come with a whole lot of play in the price. Car dealership have built in a lot of waste into the prices of their cars. Commonly referred to as the "Sticker Price", these prices not only have built in profit, they have built in marketing costs, sales commission, cost of operating their dealership (Staff salaries, utility bills, those "Free" bottles of water and snacks they offer up, etc.), and in some cases they've even built in interest into the price as well.

How do I know they also build interest into their price? Well let's think about this. Let's say a car costs $10000 to manufacture. The manufacturer of course wants to make a profit as well, so they sell it to the dealership for say $12000 a unit. This price is commonly referred to as Dealer Cost. This is different from Dealer Invoice. Don't let them confuse you with the two. Dealer Invoice is ALWAYS higher than actual Dealer Cost. Well the dealership must make money too and the manufacturer knows that and wants them to be successful so they can keep pumping units out the door, so they release MSRP (Manufacturer Suggested Retail Price). This price is ALWAYS higher than Dealer Cost (Obviously). So let's say this is set at $16500. Well that's just a suggested price. Dealerships have the ability to sell above or beyond it as they choose. Now what's the difference between a profit derived from selling the car at a price higher than Dealer Cost and a profit derived from in-house fianacing? Absolutely nothing. Both options yield dealer profit. And profit is profit is profit. So if dealerships can get away with it, they'll sell the car for as much as someone is willing to pay for it. That's why they play all those stupid games back and forth with you when you negotiate for a car's price. They're trying their best to get you to pay the maximum you're willing to pay and still turn a profit while you should be trying to get the car for the least they'll be willing to let it go for. Simple business, right?

Well because dealerships have been around the block, literally, for a long time they know people are going to expect a haggle on the price. So guess what what they've done? They've padded their sticker price to a price often times higher than MSRP so when you haggle and get them to come down several thousand dollars, you end up paying MSRP or in many cases higher than MSRP. This means they've bascially screwed you outta your hard earned money. In other words this is no different than paying interest on a loan, because like interest on a loan you experience a 100% up front loss.

I've bought cars through in-house finacing , outside fiancing, and even just with straight cash. Here's my personal experience.

1. Outside fiancing yields the highest price. The dealer is basically only getting the sale, so they charge the most.

2.In-house fiancing yields a mid-range price. They can make up any lost profit with your interest payments.

3. Cash yields the best price. Why? You'd think it'd be similar to outside fiancing because they're only getting the sale. The reason is liquidity. With cash you can close out a car transaction with a fraction of the effort and time as when you have to fill out all the fianacing paperwork and BS. They know cash buyers are a sure thing. And being a cash buyer they also know if they treat you right, you'll be back for more easy and quick business down the road. Cash buyers tend to be better financially and tend to buy cars more frequently as well.

So there you have it. If they don't drop their price if you offer up cash, then walk away. I guarantee another dealer will play ball and not try to screw you. Hope this helps.

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