The four key factors that
affect your rate
It's a common misconception that your credit score is the biggest factor that affects the interest rate you pay. This is not true. There are four other factors that lenders consider.

Factor 1: Debt-to-Income Ratio
This is defined as the amount of money you earn compared to your existing payment obligations on things like credit cards, mortgages, phone bills and more.

Lenders want to know that you can afford your auto loan payments alongside your existing debt obligations.

For example, let's say you earn $3,000 per month, with a $1,000 mortgage payment and a $500 credit card balance. Your debt service ratio would then be calculated as 0.5. Anything 0.5 and under is great.

As a rule of thumb, the higher your amount of outstanding debt payments compared to your income, the higher your auto loan rate will be.

Factor 2: Age of Vehicle
The older the vehicle, the higher the rate. Older vehicles are riskier for lenders because they are harder to resell.

If you are financing a used vehicle, it must be:

  • 2011 or newer
  • Under 130,000 KMs
  • Fully inspected by a certified mechanic

Factor 3: Exposure
This refers to the size of your loan compared to the value of the vehicle you are financing.

Many people finance additional funds above the purchase price of their vehicle. This money is often used to pay off their trade-in or other debts.

For example, you might purchase a $20,000 vehicle but have a loan for $26,000 to give yourself some extra cash.

But the higher the exposure, the higher the interest rate.

You can lower your exposure by putting money down or trading in a vehicle that is already paid off.

Factor 4: Loan Term
This is the length of time that you want to spread your payments over. It's usually expressed in months.

As a rule of thumb, the longer the loan, the higher the rate. Lenders need to cover their risk by charging a higher rate if you plan on taking longer to pay them back.

This works just like a mortgage, where you might pay 3.5% interest for 15 years, or 7% interest for a longer 30 year term.

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