Factors That Impact Auto Loans

Buying a car is a big decision, and figuring out how to finance it can be just as important as choosing the right vehicle. While credit score plays a role, it’s far from the only factor lenders consider. From the down payment amount to the car’s age, here’s a closer look at five factors that impact auto financing. 

Income and employment history 

Applying for an auto loan often means verifying income and employment history. This usually involves submitting documents that may include: 

• Recent pay stubs. 
• A verification letter on company letterhead. 
• Tax returns. 
• W-2 forms. 
• Social Security, disability, or pension statements. 

Lenders generally view applicants with steady employment as less risky than those with frequent job changes or employment gaps. Job stability gives lenders confidence that the borrower will continue to earn income throughout the life of the loan, making them better able to repay as agreed. 

Income also plays a key role in a borrower’s ability to repay a loan. Individuals with higher incomes may have an easier time qualifying and might also secure better interest rates.  

Pro tip: Self-employed applicants, like small business owners or freelancers, may need to provide alternative documentation to verify income, such as 1099 forms and client contracts or invoices. 

Loan term 

The length of the loan, or loan term, affects both the size of the monthly payment and the total interest paid. Longer terms can reduce monthly payments, but they typically result in more interest paid over the life of the loan.  

For example, a $20,000 loan at 5% interest over 84 months would result in payments of approximately $280 per month and total interest of about $3,750. The same loan repaid over 48 months would have higher monthly payments – around $460 – but reduces the total interest to just over $2,100. That’s a savings of over $1,600. 

Lenders often see short-term car loans as less risky because borrowers have less time to default. Because of this reduced risk, a shorter term may come with a lower interest rate. 

Pro tip: Comparing rates across multiple term lengths can help borrowers find the best balance between monthly payments and total interest paid. 

Down payment amount 

Lenders typically offer better rates to applicants who can make a sizeable down payment. The more money put down upfront, the less the borrower needs to finance – making the loan less risky for the lender. 

Larger down payments can also benefit borrowers. A smaller loan amount can reduce the borrower’s monthly payments and help avoid being “upside down” on the loan, or owing more on the car than it’s worth. 

Being upside down on a car loan isn’t an issue if the borrower intends to keep the car until the loan is paid off. But it can become a financial burden if the vehicle is totaled or needs to be sold early. In cases like those, the borrower may be responsible for paying the remaining balance without having a car to show for it.  

Pro tip: Experts generally recommend putting down10% on used vehicles and 20% on new ones to reduce risk and borrowing costs. 

Vehicle type, age, and mileage 

New cars with lower mileage often see better rates than older cars because they: 

• Depreciate more gradually. Older cars can lose their value quickly due to wear and mileage, and that increases the lender’s risk. 
• Are easier to appraise. More recent sales data makes it easier for a lender to assess a vehicle’s fair market value. 
• Have fewer mechanical issues.  Newer cars are less likely to break down, making it more likely that borrowers will continue making payments. 
• Have higher resale value. If a borrower defaults, a newer car gives the lender a better chance of recovering the unpaid loan balance through resale. 

Pro tip: Certified pre-owned cars can strike a balance between affordability and financing flexibility, making them a strong option for someone who may have trouble qualifying for a traditional auto loan. 

Lender type 

Banks, credit unions, and dealerships all offer auto loans, but the experience, terms, and costs can vary widely. Each lender weighs risk differently and offers different perks. 

For example, borrowers who have a relationship with a bank may find it easier to qualify for auto financing. Plus, banks typically offer competitive rates and may offer discounts for setting up an automatic payment from a checking account. 

Credit unions may offer lower interest rates and more flexible lending criteria. However, membership is usually a requirement. 

Auto dealerships can be convenient, allowing borrowers to buy a car and secure financing in one visit. They can also have access to manufacturer programs that offer promotional rates. On the downside, these loans can only be used for cars sold through the dealership. 

Pro tip: Getting preapproved by a bank or credit union before shopping can give borrowers a clearer picture of what they can afford and may improve their bargaining power at the dealership. 

Putting auto loan factors in context 

While credit score is a major piece of the puzzle, these five factors can also significantly impact auto financing. Understanding how they influence loan approval and terms can help borrowers make informed choices and confidently navigate the process. 

Contact Information:
Name: Sonakshi Murze
Email: [email protected]
Job Title: Manager