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Interest rates are often the ultimate focus point for people looking at taking loans. Of course, there are a number of other factors to consider when buying a used car – today, we’ll focus on interest rates.
A ‘good’ interest rate is a low interest rate and can really save you money. In Australia, most used car loan interest rates range from 6% to 25%. Car finance can be pretty overwhelming – we break it down for you.
Interest Rates in General
Firstly, think of interest as the ‘price’ of a loan.
Just like a supermarket for example, financial institutions need to make money to survive.
A supermarket puts a markup on their products to make a profit – financial institutions (lenders) do the same.
An example of a lender’s ‘product’ is a loan.
The markup or profit is from the interest rate. A supermarket can’t exist if they don’t make profit on things they sell – the same can be said for banks and financial institutions.
Unlike supermarkets, lender profits vary considerably between customers (borrowers) and the loan purpose.
Interest rates boil down to risk.
After you pay for your groceries and walk out the store, a supermarket’s risk is pretty much over.
However, for a lender, the risk continues over a longer period of time as loans are generally paid off over several years. To cater for the risk, lenders set a determined rate.
To find a good rate, you’ll have to consider the risk you may pose to the lender.
There are two parts of risk to the lender – the vehicle and the borrower
Used cars and older models generally attract a higher interest rate than new cars because of the increased risk.
This is basically for two reasons:
- 1: Lower resale value- in the event that the borrower defaults on their loan (resulting in the lender taking ownership of the car), the lender will need to sell the vehicle to cover the remaining loan balance.
- 2: As a general rule of thumb, used cars tend to have higher maintenance costs which can reduce a borrower’s disposable income and ability to repay the loan.
Naturally, people have varying financial profiles, derived from various financial factors over a period of time.
Those that have displayed a ‘good’ financial track record are generally rewarded with a ‘good’ rate, and vice versa.
Here are a few factors of importance.
A credit score ‘grades’ people in Australia based on their previous credit history.
Missed payments on loans, numerous finance enquiries (loans, credit cards, same day finance, BNPL) and outstanding debts, are things, among others, that can impact a credit score.
Type of employment, casual, part-time or full-time, and length of employment are considerations for a lender when assessing an application.
Permanent full-time with numerous in a role is seen favourably.
In contrast, a newly employed casual, not so. These factors would impact a lender’s willingness to lend to the respective borrower and/or impact the offered rate.
Spending habits over a designated period of time provide lenders with insight into the likelihood of a borrower’s capacity to repay a loan.
Gambling, social and unnecessary spending run the chance of sparking red flags, should they not align with a borrower’s disposable income. Again, it comes down to the risk for the lender.
Also, a borrower with past bankruptcies or court proceedings naturally creates a higher risk for lenders.
Rates at a glance
Here’s an example of what lenders often look at when setting interest rates for used cars:
|Borrower Profile||New Car||1-5 year old used car||6-9 year old used car|
|Homeowner, long time in full-time employment, high credit score||Rate: From 6%||Rate: From 7%||Rate: From 8%|
|New homeowner or long term renter, recent full-time employment, average credit score||Rate: From 8%||Rate: From 9.5%||Rate: From 11%|
|Short term renter, living with parents, student, casual employment, poor credit / poor banking||Rate: From 11.5%||Rate: From 12.5%||Rate: From 13.7%|
As you can see, lenders view more stable borrower profiles as being more likely to repay the loan, subsequently providing less risk to the lender and a more competitive rate to the borrower.
Getting a low interest rate is an excellent way to keep your costs down – It can make a huge difference and has the potential to save the borrower thousands over the life of the loan.
So what can you do to unlock a good rate?
Here are a few tips to help:
Remember that your finances will be scrutinised.
A good idea is to get your banking conduct in order several months before taking out a loan. Make sure you minimise gambling and unnecessary expenses, keep a decent amount of savings at all times and of course, don’t miss any other payments you’ve agreed to.
Consider a co-signer
In layman’s terms, a co-signer or guarantor is someone who agrees to pay your debt if you can’t – like a safety net.
They are generally people with a good credit history or are asset backed. Co-signers can lower your interest as they reduce the risk to lenders and also increase your chances of getting a loan in the first place.
Think carefully about the vehicle
As we’ve discussed, the age of the vehicle makes a big difference on the potential rate. Try and targett a newer model car should your financial circumstance allow.
Use a broker
A broker can really make a difference. They are finance experts and have answers to all your questions. They are able to ‘package’ a borrower’s application with the correct documents and match it to the most suited lender.
A broker can dramatically reduce your interest rate while increasing your chances with a loan – they can also avoid adding multiple enquiries to a credit file.
Interested to learn more?
Talk to the Home Loan Experts today. Our simple process backed by a team of professional finance brokers puts more Australians behind the wheel faster.
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