How to Figure the Interest Rate on a Car Loan
Interest rates on car loans are determined after lenders consider a number of different factors. These include income, credit, assets, age of car and price of car. In addition, lenders use a ratio called loan-to-value (LTV) to come up with a rate. If you are in the market for a new car and car loan, it's wise to try and estimate the rate you'll likely receive.
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Instructions
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Pull a copy of your credit report at the Annual Credit Report website. This is the federally-mandated site that offers free reports to all American consumers. You must also pay for a copy of your FICO score. This is a three-digit number that represents your overall credit profile. Excellent scores are above 720 and poor scores are below 600.
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Find the car you wish to purchase. Determine the estimated purchase price (after sales tax and any additional features). Finally, determine how much you are planning to put down on the car. This will give you a rough idea of the loan amount you'll ultimately seek.
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Calculate the loan-to-value on your vehicle. To do this, simply divide the estimated loan balance (Step 2) by the value of the vehicle (use Kelly Blue Book for values). Good LTVs are below 80 percent. If you can afford a larger down payment, your loan amount, payment and interest rate will be lower.
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Calculate your debt-to-income ratio (DIR). This is the ratio lenders use to determine your ability to repay a loan. Most lenders want to see your DIR below 50 percent. To calculate this ratio, divide the sum of all monthly credit-reportable bills by your total monthly gross income.
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Research lenders based on your credit score. If you have excellent credit, stick to banks and local credit unions. Look at their offered rates for the most well-qualified borrowers. The profile of the best qualified customer is: excellent credit (above 720 FICO scores), a DIR below 40 percent and an LTV below 80 percent.
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Call a prospective lender and ask for their interest rate matrix. This is the guide lenders use to determine rates. You can check your rate based on your DIR, LTV and credit.
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