What affects car loan payments?
Car loan payments depend on three main things:
- The amount you’re borrowing
- How long you have to pay it all back (the loan term)
- The interest rate
As expected, the amount you borrow directly affects the size of your regular payments over your loan term and interest rate. Opting for a longer repayment period results in smaller payments spread over more time, though it means paying more interest in the long run. And a higher interest rate will always significantly increases the overall cost of the loan.
What is car loan interest?
When you get a car loan, the lender is giving you some money to help pay for the car. They expect you to pay the money back steadily over an agreed time (the loan term). They’ll also charge you an extra amount called interest, which is how they make money as a business.
Car loans usually have what’s known as ‘simple interest’. This means the interest you pay each fortnight or month is a percentage of the amount you still owe (the principal) at the time.
To make budgeting easier for borrowers, most car loans are set up to have a fixed interest rate (it doesn’t change) and the same regular payment amount for the life of the loan. As the amount you still owe comes down, the amount of interest charged also decreases, so you repay more principal each time.
What affects car loan interest rates?
There are two broad influences on the rate you’ll be charged:
- Market interest rates – how much the car loan provider has to pay their depositing investors or wholesale lenders to get the money they’ll lend to you at a slightly higher rate
- The risk involved in lending you money to buy a car
If a lender thinks there’s more risk involved, but they’re still willing to go ahead, they’ll charge a higher interest rate to cover potential losses over time. If the risk is lower, they’ll typically offer a lower interest rate to remain competitive and win your business.
Here are the main things that influence risk and car loan interest rates.
Car loan deposits and interest rates
A deposit is the amount you contribute towards the car at the beginning of your loan.
If you can’t keep up your car loan payments, the lender can usually take back your car and sell it (repossess it) as a last resort. They can keep the amount you still owe, plus any other reasonable expenses and give you anything that’s left over.
Since cars lose value over time, a low deposit means there’s more risk that the lender won’t get their money back if you can’t make your loan payments. That’s why low deposit loans tend to come with a higher interest rate and vice versa.
This also explains why you usually have to have full car insurance when you have a car loan.
Types of car and interest rates
Some cars hold their resale value more than others. It usually depends on the model and how old it is. As cars age, they’re more likely to need major repairs that would significantly reduce their value if they had to be repossessed and sold without being fixed.
The more likely a car is to lose value, the more risk there might be for a lender and the higher the interest rate might be. It’s always a good idea to ask about the interest charged on loans for the different makes and years of cars you’re considering. It can help your search for the right car.
Your credit rating and car loan interest rates
When you apply for a car loan the lender will check your credit report and credit score. They’re available online to you and registered lenders. Your credit score is based on how well you’ve managed debts, such as loans, credit cards, layby purchases and utility bills in the past. It also shows your current debts and any loan applications you recently made.
A higher credit score is more likely to attract a lower interest rate on a car loan. That’s why it’s a good idea to check your score, take steps to improve it if you can and enquire about anything you think is inaccurate. You can check your score online for free at My Credit File, Centrix or Illion. The New Zealand government website has more on how to check your credit record.
Your income and car loan interest rates
Lenders are legally required to check a loan is affordable and appropriate for the borrower’s situation. If you can show a reliable and regular income that would more than cover your current expenses, including the proposed car loan payments, then you might be offered a lower interest rate to reflect your lower risk.
Next steps for sorting your car loan
Whether you’re about to start car hunting, or you’ve already seen a suitable vehicle, Auto Finance Direct is ready to help. We make it quick and easy to apply for a loan and see our best car loan interest rate offer. You can do this through many vehicle dealerships in New Zealand or apply online now.
