Modern Australian
Business Coach

What determines your car loan interest rate?

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You are in the market for a new car, and you want a great finance deal. Currently car loan interest rates range from 4% upwards to 20%. What determines the rate that a lender will offer? In a nutshell, is it both the car being purchased (age and valuation) and your risk profile (employment, residence and credit file), that determines your car loan interest rate.

  1. Asset age

  2. Asset valuation

  3. Employment history

  4. Residential history

  5. Credit file

1. Asset age

This is quite an important component in determining your interest rate. Some lenders will only finance cars up to 8 years old, others will go to 12 years old and other lenders will go to 20 years. This is because motor vehicles are deemed less and less acceptable, as security for a loan, the older they get. As the age of the asset increases, we find that the interest rate also increases. New to 4 years old cars get the most competitive finance rates.

2. Asset valuation

Do accessories add value? For new motor vehicles, lenders are quite happy to add the value of any accessories. They will even include any add on’s in the finance amount. Accessories include such things as a tow bar, bull bar, snorkel, roof cage, ute tray, canopy, toolbox, upgraded suspension and so on. As the accessories are new and are invoiced by the supplier, lenders are quite happy to take accessories into account when valuing the car.

However, it’s a different story when you are looking at a 6 or 8 year old 4WD that someone else has done up for camping or touring. The last owner may have spent $15 to $20 thousand dollars on the vehicle. But, because it is second hand, the lender determines the value by using the average sales price at auction of that vehicle type. Lenders rarely take into account any accessories on second-hand vehicles. If a roof rack is 10 years old, then it’s not worth much now. From a lenders point of view, they are not going to get their money back if a customer defaults on the loan and they must dispose of the vehicle.

3. Employment status and history

Whether you are employed full time, part time or casual, for how long and at what pay. Long term stability in a well-paying job is deemed less risky than short term casual employment. Your pay will need to demonstrate that you have affordability to pay the loan when considering all other expenses. These expenses include rent or mortgage repayments, utility bills, living expenses, other loan repayments and so on.

4. Residential status and history

Your risk profile changes if you are you a renter, boarder, mortgage holder or investor. Asset backed individuals, that is, those with a mortgage or own their own home, are deemed lower risk and as such are offered a lower interest rate than a renter or boarder. Stability is also a factor. Lenders will look to see if you move every 6 to 12 months or if you have been in your current residence for several years.

5. Credit File

Your credit file list your current and past lending history, including defaults and late payments, as well as all finance enquires. If you have had loans in the past and made regular repayments, then lenders want to lend to you again. This lending behaviour is reflected in your credit score which will be relatively high. On the other hand, if you are living day to day, using pay day loans to get you through or you have a history of paying late then lenders will not be too keen to help you. This lending behaviour is also reflected in your credit score. Find our what credit score you need for a car loan.

What are the advantages of using AAA Finance v’s car dealership finance?

1. Licensed, Trained, and Accredited

AAA Finance has a credit licence, and you will deal with a broker who has financial accreditations and training. Chances are the finance person in the dealership was selling pools or carpet last month! There are no requirements for car yards to have any finance licences or accreditations. Nor do they have to abide by the NCC – National Consumer Codes. A recent recommendation from the royal commission was to remove the point-of-sale exemption that allows car yards to sell finance when they are not licensed to do so.

2. Access to Multiple Lenders

The downside of using a dealer is that they have 1, maybe 2 lenders. Regardless of whether that lender is the best lender for you, they are going to apply to that lender as it is the only choice they have. Dealerships also get discounts from the lender on paying interest on the cars they have in stock.

When you go to a brokerage, like AAA Finance, you have access to a large range of lenders. AAA has over 40 different lenders. Each of these lenders offer different products, have different lending requirements and interest rates. We have several specialist lenders for low doc business car loans.

Quite often we review 10 to 12 lenders per application to work out which lender will be the most cost effective and is most likely to give an approval. It is to this lender that we submit the finance application to.

3. Maintain your Credit Score

Any finance enquiry, that is made by you or someone acting on your behalf, will be listed on your credit file. If you have a loan application declined this is also listed on your credit file. Each enquiry affects your credit score negatively. If you have multiple enquires on your credit file it is considered ‘busy’ and your score declines. Our job is to determine the lender that will best suit your individual circumstances and get you an approval the first time!

4. Get an Approval, NOT a Decline

AAA Finance assesses each finance application and determines which lender is most likely to give an approval. Frequently we have clients come to us after they have been declined at a dealership. The dealer has submitted a finance application to a lender, and we can see that it was never going to be approved. The dealer was trying to fit a round peg in a square hole. The client ends up with a loan declined through no fault of their own which is then listed on their credit file.

An experienced AAA Finance Broker with access to over 40 lenders will get you the best car loan approval possible to suit your individual circumstances with most loans are approved within 24 hours.


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