Factors that affect car loans

13 September 2016

Factors that affect car loans

Factors that affect car loans

When you’re looking for your next car, you may be entirely focused on deciding what you need from your latest set of wheels. It’s not uncommon to forget to think about how you’re going to pay for it, until after you’ve found exactly what you want.

If you’re planning on making your purchase with a car loan, you may want to consider your finances a little sooner. That’s because your ability to get a good car loan will be affected by a number of factors. And while some elements are under your control, others may be a little harder to influence. 

Quick takeaways:

  • It’s a good idea to explore your car loan options before settling on your chosen vehicle – it gives you breathing space to decide what’s right for you.
  • Your credit score, debt to income ratio, size of loan and a number of other factors are considered by lenders – find out more about these below.

Read on and find out more about the main factors that will influence your car loan.

Credit score

Your credit score has a big part to play in determining if a lender will want to provide you with a loan. The details kept on your credit record show whether you have been able to manage debt in the past.

If you’ve missed payments, then your credit score will reflect that. That means that businesses will be more reluctant to lend you money and you may pay a premium to borrow - usually in the form of a higher interest rate.

Debt to income ratio

Most borrowers review a potential customer’s debt to income ratio before they decide to lend money. This ratio creates a clear picture of how much debt you have and how much income you have available to service the debt.

Because it’s a ratio it takes into consideration that if you have a higher income you’re able to cope with higher levels of debt. But finance companies will be reluctant to lend to you if they perceive that all of your available cash is tied up in repayments for existing debt.

Size of loan and deposit

There’s a lower risk in lending small amounts, and you should therefore find smaller loans easier to apply for. The same is true with deposits: they’re great at lowering the risk for the lender. So if you’re willing to put down a big deposit on your car loan or you only want to borrow a small amount, your lender is likely to feel much more comfortable giving you the money you need to complete your purchase.

Length of loan

When you’re applying for a car loan, you should be aware that while shortening the term of your loan will increase your repayments, it will also reduce the amount of interest you pay. Wherever possible, it’s a good idea to take debt over the shortest time possible – it reduces the cost of borrowing.

Getting a car loan isn’t just about choosing the car you would like to buy and then looking for finance. If you want to control both your choice of car and the finance that will pay for it, it’s important to consider the factors that influence car loan providers.

It’s a good idea to take a look at your car loan options some way ahead of making a purchase. That will allow you to understand exactly what your finance provider needs. You can then work proactively to ensure that you are able to tick all the boxes and access the best deal possible.

If you have any questions about vehicle loans from AA Finance or would like to find out more about your options, contact one of our team on 0800 500 555.

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Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure the content is correct, the information provided is subject to continuous change. Please use your discretion and seek independent guidance before making any decisions based on the information provided in this article.

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