Everything to know about used car loan interest rate

Whether you have just turned 18 or intend to relocate to a new place with a slew of new bills, a used car is likely to be your first choice when it comes to owning a vehicle. The reason for this is these vehicles require less maintenance and are inexpensive. Financial institutions can readily finance a used car even if you have a tight budget. But, before you go any further, let's go over the factors influencing the used car loan interest rate.

1. Car's value:

The very first thing that influences the interest rate of a used car loan is the car's value. Keep in mind that a vehicle's value depreciates with time. The prime causes of car depreciation are normal wear and tear of its components, end of engine life, dent or scratch, etc. If the car you intend to buy is not in good shape, the lender is likely to reject your application or charge you a higher interest rate.

The lender takes into account car value since, if you default, they have the option of seizing and auctioning your vehicle to recoup their losses.

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2. Car model and age

Another crucial factor that the lender considers when establishing the interest rate is the model of your car. Assume you bought an XYZ model car. However, the manufacturer discontinued producing that car years ago. Do you believe the lender will be able to recoup its losses if you default in this case? The answer is no. It's because the lender is unlikely to find anyone interested in bidding on a car which is no longer manufactured.

Age is yet another decisive factor. Cars that are more than five to six years old may not function as well as cars that are two to three years old. As a result, older cars will have a higher interest rate than those that are between two and three years old.

3. Loan tenure

Used car loans are available for the maximum repayment tenure of seven years. If you want to save on the interest component, it is recommended to choose a shorter repayment tenure. Here’s the table to consider if you are wondering about the reason.

The above table suggests if you go for a shorter tenure, you can save a lot on the interest component. But contrary to this, don't overlook the EMI factor. The shorter tenure might make it difficult for you to manage your debts in the long run. As a result, you must thoroughly evaluate your budget before choosing this component.

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4. Down payment amount

Down payment refers to the amount you pay from your pocket at the time of financing your car. The lender usually expects you to pay a minimum of 10% of the car's current market value. However, if you pay more than that, you have a good chance of getting a loan with a lower interest rate.

The low rate is due to the lender's lower credit risk. Financial institutions assume that borrowers who put down a larger down payment have more money invested in their accounts. As a result, the chances of them defaulting on their debt are considerably lowered.

5. Car modifications

Never get tempted by seeing the modifications in the car. It's because not every modification is ideal for your car. Some modifications are illegal, while others significantly reduce the vehicle's performance. So, here's a list of alterations you should avoid if you want to secure comparatively low used car loan interest rate. 

• Avoid buying a car with tinted window glass and poor visibility of less than 50%.

• Never invest in a used car with aftermarket exhaust pipes and silencers that are loud.

• In case you discover changes to the car's tyres and headlights, say no to that car.

• Avoid buying a car with a fancy registration number plate. 

Remember, investing in such cars will either result in a loan application rejection or a higher interest rate.

6. Your income

Your earnings have a major influence on your used car loan interest rate. If you have decent earnings and are somehow meeting the lender's qualifying criterion, the chances of securing a low-interest car loan are very slim. Furthermore, if a significant percentage of your income is used to cover the existing debt, the lender will see you as a high-risk borrower.

Thus, even with an average income, mentioning your supplementary source of income (if any) on the application or adding a co-borrower is the easiest approach to acquiring a low-interest loan.

To conclude

Anything that affects your creditworthiness and raises or lowers the risk of lending plays a factor in determining the used car loan interest rate. Thus, if you want to receive a low-interest loan, make sure you consider the above aspects and work on them before submitting your application.