When someone looks to buy a car, chances are that they will look at car financing because they need the extra funds to acquire a vehicle. At The Smarter Finance Company, we make it our business to know what can give you a big advantage when you’re shopping for a car loan and one of those ways is by understanding how interest rates work!
Interest Rates are known as the rate at which financial institutions will lend money to borrowers so it pays to know how they can help you get a better car financing deal!
What is affected by interest rates?
Lenders are very skittish about who they lend their money to. They will look into a person’s background and income to see how stable they are and whether lending to them might be a risk. A risk meaning how probable the money will be returned to them in whole regardless of how long the tenure may be! If a person is risky, chances are that a greater compensation is needed just in case the very next payment may be defaulted – that compensation is the interest rate that you’re charged at! The lower the risk of lending to a person, the lower the interest rate can go!
Tenure of loan
The longer a borrower takes to pay back an amount, the higher an interest rate tends to be. Because things are unpredictable over a long time – such as whether market conditions would be better or worse, or whether the borrower will have the same ability to make his payments, it make sense for the lender to charge more as a precaution against the uncertainty.
If you have an opportunity to pledge something that belongs to you to get a lower interest rate, chances are you would do it! It is a risk that you take too because in case you are unable to make monthly payments, the lender has the right to possess that pledged item or collateral as restitution for their losses! But because they have a means of recovering some value, chances are they will be more willing to give you a lower rate for your car financing needs.
The last thing that lenders are concerned about is inflation. Changes in the economy that cause prices to rise, is called inflation. You won’t be able to buy nearly as much with the same amount of money years down the road. Therefore, lenders factor in what they anticipate inflation to look like in the future when they figure your interest rate.
With these nuggets of knowledge, we hope that we can better prepare you for what may come from the financial institutions and lenders that you’re looking at taking car financing from. If you would like further advice and some help to get even better loan rates, you can contact us – The Smarter Finance Company!