Ever wondered what determines the interest rate you get for finance?
You may have seen or heard advertisements on tv, on the radio, in your local newspaper advertising car loan interest rates. Yes they may look appealing when they show a rate in the low single digits but have you ever wondered what factors actually determine the interest rate you receive? Why doesn’t everyone get offered the same interest rate? Why doesn’t everybody get that low rate advertised? And, what can you do to make sure you get the best possible interest rate from a finance lender?
While every lender uses slightly different criteria to determine the interest rate they will offer to a particular customer for their next car, boat or caravan purchase, there are general guidelines that all lenders adhere to. Knowing and interpreting these guidelines is the job of a finance broker, which is why it is always a good idea to contact your personal Approved Car Loans finance consultant prior to making an application for finance. While you may be able to secure a pre-approval for your new car, boat or caravan through your own bank or directly through a finance company, they may not have the best market interest rates or a finance product to suit your current situation. Whereas Approved Car Loans has access to over 30 leading Australian finance lenders and compare them all on your behalf to secure you the best possible finance approval for your circumstances. We negotiate with lenders on your behalf to save you time and money and to ensure you get the finance approval you deserve, not just the finance approval your bank wants to give you.
So what factors do influence the interest rate I receive?
When a lender assesses your application for finance, they are essentially weighing up the amount of perceived risk between your application and the vehicle you are buying. They assign an interest rate tier to an application approval based on the total risk that your application is deemed to carry and decline applications that don’t conform to their specific borrowing or lending criteria.
1. Your credit rating
Your credit rating is possibly the most important aspect of your application and you should actively protect it if you intend to apply for finance at any time in the future. Every time you apply for credit, whether it be in the form of a loan, a credit card, a mobile phone contract or a utility bill, the company will usually access your credit file to make a determination as to your suitability and the application will usually be recorded as an enquiry on your credit file. Your credit file will also contain information relating to any prior defaults, bankruptcy or finance-related judgements against you. It is extremely important to protect your credit file from negative judgements and unpaid bills because once recorded, they will affect your ability to gain a finance approval in future. Even an unpaid electricity bill can be recorded on your credit file and affect your ability to obtain finance.
2. The number of enquiries on your credit file
In addition to defaults and negative judgements, a lender will consider the number of enquiries on your credit file when assessing an application for finance. If you apply to a number of lenders in a short space of time it can make lenders uneasy about approving your application since they can’t know whether your application has been approved elsewhere and you are planning to take out multiple loans. Or if your application wasn’t approved elsewhere, why not, (what has another lender seen in your application that made them choose to decline your application)?
3. The vehicle you are purchasing
One of the most important, and often overlooked factors assessed during a finance application (that you definitely have control over) is the vehicle you are purchasing. The amount of risk in a vehicle is determined mainly by the age, kilometres and condition of the vehicle. The older the vehicle, the less it is worth to a finance company, because the harder it is for them to sell if you were to default on payments and they were forced to repossess and sell your vehicle. Lenders generally reserve significantly lower interest rates specifically for new vehicles purchased from a dealer. Whereas, if you are looking at purchasing a 10 year old vehicle for example with high kilometres from a private seller, these factors clearly present a much higher risk to a lender, Approved Car Loans may still be able to secure you a finance approval, however it is important to keep in mind that it won’t be at the lowest market interest rate because of the vehicle specification and this will be the case no matter who you choose to finance through.
4. Your employment history
If you have been employed in stable, full-time employment for the past 10 years, you will be more likely to receive a competitive interest rate than the 20 year old kid who is casually employed, on a probationary period and hasn’t held the same job for more than 4 months at a time. This is because the chances of you maintaining employment for the duration of the loan and consequentially being able to make your loan repayments is a lot higher and therefore the risk is inherently lower for the lender.
5. Your residential status
Lenders tend to reserve the lowest interest rates for applicants who either currently own or are buying their home and have a proven, successful track record of making mortgage payments on time, every time. Whereas, if you’re currently short-term boarding with a track record of relocating every 6 or so months, lenders may become uneasy and the risk associated with your application for finance will be higher. This is not to say that you will automatically get a bad interest rate if you’re renting or boarding. Lenders are simply looking for stability in your residential status, so whether you are buying, renting or boarding, lenders will want to see that your residential status is stable to lower their risk.
6. Your assets and liabilities
In addition to your employment and residential status, lenders will assess your assets including savings, vehicle, property and your liabilities including other loan commitments, credit cards and other regular payments to ensure you have the ability to repay the finance. The more liabilities you currently have in the form of other loan commitments and credit cards and the closer this total liability figure is to your total income amount, the more risk a lender will assign to your application.
7. Your savings and bank account conduct
Lenders will generally want to know how much money you have in savings. A savings pattern demonstrates your consistency, stability and above all, your ability to manage your money. Your bank account conduct again demonstrates to a lender that you are able to manage your money and can detect any undeclared debts that may affect your capacity to repay a loan. So make sure you declare any existing debts or liabilities you have currently, ensure your bank accounts have sufficient funds to cover your upcoming bills and keep your accounts in a positive balance. This will demonstrate positively to a lender that you can effectively manage your money and successfully repay a loan.
8. Previous loan conduct
Lenders may contact any companies you have previously had finance through for a reference on your repayment history. It is imperative that you make sure that any current loans you have are not in arrears and are paid on time. If a lender can do a reference check on you and receive a glowing report on your repayment history, they are more likely to approve your finance application and offer you a better interest rate.
As you can see, there are a number of things you can do to help yourself secure a low interest rate on finance. Keeping track of your current liabilities and making sure they are paid on time can not only save you a lot of stress, it can also save you a lot of money on late payment fees and account overdraw fees. More importantly, it ensures that you protect your credit rating from defaults and judgements which can make obtaining future finance easier and again save you money by helping you secure a lower interest rate on future finance.
There are many things to consider when applying for finance and every lender has different lending criteria they use to assess your application to determine the interest rate they offer you. Take the guesswork out of finance by calling the friendly staff at Approved Car Loans on 1300 4 CAR LOANS (1300 422 756).
Our consultants will compare the leading lenders on your behalf and provide you with the best finance approval for your circumstances. We also offer fully protected loan packages including shortfall protection, credit rating protection, comprehensive insurance and vehicle warranty options. Or you can mix and match and build the perfect package with inclusions tailored just to suit you.
Our consultants are available 7 days a week for your convenience, call us today on 1300 4 CAR LOANS (1300 422 756), apply online in 4 easy steps for your fast, friendly approval or get a 60 second finance quote online.
Or Give Us A Call - 1300 4 CAR LOANS (1300 422 756)
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