Where did you get that rate?
After being around the car finance industry for a number of years now, I have dealt with customers of all shapes and sizes.
How many children? Anywhere from none to seven!
How much is outstanding on your mortgage? $7000 to $4.8 million.
How long have you been living where you are? From ‘moving in tomorrow’ to 48 years.
Everybody has a unique set of circumstances with regards to things like employment, marital status, residential status, income, expenditure, assets and liabilities. For a financier this poses a lot of problems. Should everyone get the same interest rate on their car finance?
An interest rate is, in layman’s terms, a risk based insurance for the lender. How does that make sense? A lender is giving you something of theirs, and expecting that you return that over a pre-determined amount of time. They know that there is a possibility that you will not return what they lent you, so they need some insurance against that. Charging interest on top of the amount to be paid is a way they can hedge against this risk. Taking security over your vehicle is more insurance against this.
Now, how is the risk determined? There are a number of factors that will go towards the lender working out the risk factor. These include, but are not limited to;
- Employment and residential stability – how long have you been at your current and previous address and employment?
- Income and expenditure (sometimes referred to as capacity) – do you have enough income to service all of your existing expenses and then this new loan on top?
- Assets and liabilities – do your assets outweigh your liabilities? Do you have equity in a property or good cash savings in the bank?
- Previous car finance repayment history – have you been approved for car finance previously and repaid the amount over a fixed term?
- Asset you are using as security for the loan – is it worth more or less than what you are borrowing against it?
Here is an example…
Customer 1 – 32 year old single teacher, has been working with the same school for 8 years, has been living at the same address for 6 years, renting through an agency. Purchasing a $30000 vehicle and putting $5000 deposit towards it. They have $15000 cash in the bank.
Customer 2 – 22 year old single salesperson, has worked at three different employers in the last 5 years, three different addresses in last 3 years, boarding with a friend. Purchasing a $30000 vehicle but trading a vehicle worth $10000 that they owe $15000 on, not putting any deposit towards the loan.
These two customers could be buying the exact same vehicle, but the risk profile is completely different. One customer has been stable in employment and residence and is renting through an agency. They will be able to show proof of what they pay for rent. The second customer who is boarding will not be able to show any formal lease agreement and seems to move jobs and addresses very regularly. This means that if worst come to worst, and the financier needs to track this person down because they are not making payments, it will likely be much harder to find them.
Customer 1 is also financing $25000 against a car worth $30000, and customer 2 is financing $35000 against a car worth $30000 as well. Again, the financiers have to work on what will happen in a worst case scenario – if they need to repossess the vehicle to get their money back, there is a much higher chance they will recoup their losses for customer 1.
As you can tell, there are multiple factors that go towards establishing a risk profile, and thus the interest rate that you will be eligible for on your car loan. Why not speak to the experts at 360 Finance to see how you score?
