Everything runs on credit. In fact, for the majority of us, there are no major purchases we can make that won’t utilize some form of credit. For this reason, your credit score can be considered an integral part of your identity. It is how companies evaluate you as a consumer and how lenders gauge your ability to repay a loan.
There are a lot of moving parts that make up a person’s credit score, and the Prime Rate is one of the more critical parts. GFA Financing is going to explain the purpose of the Prime Rate, and how it affects your potential car loan.
Risk – What Is It?
With any loan, there is a risk involved. The lender is taking a chance on the borrower in the hopes that they will repay their loan on time and in full. The interest rate is the payment to the lender for the risk they are taking by extending credit for a car loan.
The interest rate is calculated based on the credit score of the borrower, the amount of the loan, and the overall payment history of the person borrowing money. Your credit score shows how reliable you are as a borrower. The higher your score, the lower your payments and interest rates will be.
Short Term Car Loans
Good credit helps with securing lower interest rates, and it also helps with getting a shorter-term car loan. Paying off your car loan quicker not only reduces the risk to the lender, but it also saves you money on the cost of interest over time. Lenders love shorter-term loans for those with grade A credit scores. On the other hand, most people that have moderate or poor credit scores will have a harder time securing a short term car loan, if they can at all.
How Does the Prime Rate Affect a Car Loan?
A deep subprime consumer is one that has a credit score that falls between 300 and 500. These types of borrowers are highly risky. Subprime consumers are those with scores that fall between 501 and 600. These consumers have less risk, and their interest rates will be slightly better than the lowest tier. Non-prime consumers are in the middle of the pack, they have numbers that fall between 601 and 660. This is a good place to be as a person with new credit or who is just starting out. Prime consumers are those that have scores that range from 661 to 780, and these are considered good, minimal risk borrowers. Superprime consumers are those with scores of 781+ and are like unicorns in the lending community.
Scores & Interest Rates
The lowest tier of borrowers will be offered interest rates in the high teens up to 20%. This is a very high number that often causes all but the most desperate to avoid applying for a car loan. Nonprime borrowers can expect rates that range from 7% to 11%. While still a bit high, these rates are more palatable for most consumers. Prime buyers and above are the ones that get the best rates. These interest rates tend to range from 3.5 % to 5% for a car loan.
If you’re interested in purchasing a vehicle from our dealership, it’s a good idea to try and improve your credit score so that it is at least in the non-prime level to get a more affordable rate. However, even if your credit score is less than ideal, our bad credit car loan experts will be able to assist you. We always aim to find the best possible rates for our clients, and our experts would love to speak with you about the best solutions for your specific situation.
How GFA Financing Can Help
Buying a car can be an exciting adventure, but it can also cost a pretty penny if you have poor credit. GFA Financing is here to help you make the most of your purchase by working with you to restore your credit and help you find a Toronto auto loan that offers terms that you can afford. For more information regarding our services, or to find out more about credit scores, give us a call at 1-888-721-0731 today.