One of the most difficult aspects of an auto loan to plan for is the interest rate. There are so many factors to consider: your current auto-enhanced FICO score, the age of the car, the lender itself, etc. Fortunately, you can find a good estimate of the auto loan interest rate that you deserve. So, here are a few tips to help you tell what auto loan interest rate you deserve.
Auto-Enhanced Credit Score
Your interest rate will be based off your auto-enhanced credit score, a score which more heavily weights your history with automotive loans and leases. Unfortunately, none of the credit reporting agencies will sell you this auto-specific credit score, but they do sell your generalized score. The price varies between $7 and $20 depending on the source you buy from. We suggest that you buy your score from FICO, so this tip will be geared toward that score. With this score in hand, you can estimate your FICO auto-enhanced score. If you have used auto loans responsibly in the past, your auto-enhanced score will be higher than your base score. The key is to have had at least two paid as agreed auto loans with a monthly payment in excess of $150. If so, your auto-enhanced score should be at 75 points higher than your base score.
LTV and DTI ratios
The amount of money you need to borrow compared to the value of the vehicle (loan-to-value ratio or LTV) affects the interest rate that you will be asked to pay. Lenders want to see an LTV of less than 115 percent. The higher the LTV, the higher your interest rate will be. Offering a higher down payment will eliminate this issue.
Next is your debt-to-income (DTI) ratio. Lenders want to see that your monthly payments: rent or mortgage, credit cards, etc do not exceed 40 percent of your gross income. Again, the higher your DTI, the higher your interest rate will be. If possible, you should try to pay down your credit card debt before applying for an auto loan.
Estimating APR Based on Credit Score
FICO offers a great tool to help you get a base estimate of the auto loan interest rate that you deserve at this link: http://www.myfico.com/myfico/creditcentral/LoanRates.aspx. Be sure to read the fine print below the chart so that you get an understanding of the parameters of the interest rates quoted. If you have any questions, hit us up in the comments section and we will do our best to provide the answer that you need.