Vehicle Loan Rates

It’s amazing how you can go to two different lenders, apply for auto financing and get two completely different vehicle loan rates. Lenders look at exactly the same information — your income, your credit history, your employment profile — and yet they come up with such different results for financing. How is that possible?

First, it’s important to have an understanding of interest rates. They’re actually a mechanism by which a finance company can control their risk. If a person looks like a really good potential customer, the company really wants that person to borrow money from them. So the company will offer a very low rate to entice the customer to use its financing. On the other hand, if a customer has a questionable credit history, the company may still be willing to offer a loan, but at a higher rate. The higher rate helps mitigate the risk that the customer represents. At the same time, higher vehicle loan rates can also encourage the person to shop for a loan somewhere else. In a sense, it’s actually meant as a way to discourage the person from using that company’s financial services.

That’s a surprise to many consumers. Lots of people believe that every finance company wants their business. But when you’re in business to make money through successful loans that get paid out to completion, there’s a premium that gets placed on the very best customers.

Another thing to understand is that most lending companies have “decision trees” that help them make their underwriting decisions. Each lender generally has their own way of evaluating a customer to determine whether that person is a good potential customer. So they pull your credit report, find out as much information about you as they can, and plug it into their system. The system goes through a series of questions and “weightings” to come out with a custom score that’s based on that company’s track record with similar customers. The better you “score out,” the more that company will want you to borrow money from them. So you’ll get offered vehicle loan rates accordingly.

Keep in mind, none of this is personal. A bank or lending company isn’t making a value judgment about you as a person. Rather, they’re trying to determine whether working with you — and lending you money — is a good decision for bottom line of their company. Whether it’s a public company (which has to answer to stockholders) or a private company (which has to answer to its ownership), they have to offer the right vehicle loan rates to make sure they make money instead of losing it.

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