When shopping for a new car, some people focus all their attention on negotiating the price, and they pay little attention to their interest rate. Getting a great deal on a car loan isn’t only about price. Sure, the final price of the car affects how much you pay each month. The interest rate, however, also plays a role in this equation. Even with the best sale price, a higher rate can eat at any savings. A low rate keeps the car affordable and increases purchasing power.
If you’re ready to buy a new car. Here are four tips for getting a great auto loan rate.
1. Go New (Brand New)
The car that you decide to buy influences your interest rate. Auto loans for new cars typically feature lower rates than auto loans for used cars. Newer cars also cost more than used cars, and understandably, you may question the savings. However, a cheaper rate can be the difference between a new and a used car.
Maybe you have your heart set on a brand new car, but settle for a used one because you feel that you can’t afford the payment on a newer model. Nowadays, it’s not uncommon for finance companies to offer 0% interest or another super low rate on a brand new automobile. A used car may cost $5,000 less – which sounds better and cheaper. But even with excellent credit, you’ll pay an interest rate of at least 4% for a used car. However, if you qualify for 0% interest, you can probably purchase a brand new car with a payment slightly higher than a used car loan. Use an online auto loan calculator to crunch the numbers and compare your savings.
2. Go Short
A five-year auto loan is a comfortable number for most people. This results in the lowest monthly payment and increases affordability. Unfortunately, a longer payment term doesn’t result in the best interest rate. What you pay in interest affects how much you pay over the life of your loan. The more you pay, the more your finance company earns.
Some banks are slick, and with regards to auto loan terms, these banks never give options. They work up the paperwork and automatically base payments on 60 months, even when an applicant can afford to pay off the loan sooner. Understand, however, a five-year auto loan isn’t written in stone, and you can go with a shorter term. A two, three or four-year term typically features lower interest rates than a five-year loan. Going short increases your monthly payment, but you’ll pay less interest and pay off the balance quicker.
3. Check Your Credit
Don’t expect a great interest rate if you have a low credit score. There are auto loans for people with bad credit. Some dealerships and finance companies refer to these as “fresh start” loans, and they’re designed to help people build or reestablish credit. This is an excellent provision, but it comes with a hefty price.
Auto loan rates are directly related to credit scores. Apply for an auto loan with a 750 or higher credit score and you can expect the most favorable rates. On the other hand, apply for an auto loan with a score in the mid to low 600s, and you’ll pay a much higher rate.
To get the best auto loan rate, get a handle on your credit. Check your score and credit report beforehand, and then make improvements. You might have to postpone applying for a car loan. However, any effort to boost your score can help you qualify for a better rate and enjoy a lower payment. Pay your bills on time, pay off old debt and pay off your credit cards.
4. Compare Lenders
No two lenders are alike. The same way you shop around for the best electronics or clothes, you need to shop around and compare banks. Too often, car buyers make the mistake of applying for a loan at the dealership, and going with any finance deal. This doesn’t guarantee the best rate or the most savings.
Be financially savvy and have your own financing in place before shopping for cars. Go to your personal bank, as well as one or two other banks in your area. It only takes a few hours to get pre-approved for an auto loan. And with a pre-approval, you learn whether you’re eligible for an auto loan, how much you can afford, as well as your interest rate. You can still complete an application with the dealership. But with your own financing, you’re not obligated to accept their terms.
Applying for any type of loan can slightly ding your credit score. To avoid multiple credit inquiries, you may feel that it’s best to only apply for one loan. Credit scoring models, however, are designed to recognize comparison shopping. As long as all your inquiries occur within a 30-day period, applying for multiple auto loans will not hurt your credit score.
What steps have you taken to snag the best auto loan rate?