For most car owners, getting a new or used vehicle is only viable when some type of financing is involved. Fortunately, loans for cars are made available from a variety of sources, including your local bank or credit union, an online lender, or the dealership itself.
Although a number of outlets exist for securing your next vehicle loan, not all are created equal. It’s important to consider how much that loan will cost you in the long run, based in part on the offered interest rate.
Before accepting financing from the first available auto loan source, here are a few steps to take to ensure you get the best annual percentage rate (APR).
1. Check Your Credit History Report and Score
No matter where your new auto loan comes from, the interest rate on it is always tied to your credit history report and score.
Prior to falling in love with a new vehicle that you plan to finance, know what’s going on with your credit. Do you have late payments or significant balances on credit cards? If so, you will want to clean up some of those black marks before asking anyone for financing.
While you may get approved for a new car loan with less than perfect credit history, it will cost you a pretty penny over the life of the loan by way of the interest rate. A credit score of 650 or above should allow you to obtain an auto loan with a decent APR, however, a credit score of 750 or more will help get you the best interest rate.
2. Shop Around for the Best Auto Loan Rate
Once you know if your credit is up to snuff or not for most lenders, your next move is to do some shopping. Interest rates are relatively similar from lender to lender since they are tied to the prevailing interest rate set by the Federal Reserve. So, in a low-interest rate environment, most lenders will offer well-qualified borrowers a relatively low APR on a new loan.
However, the small differences in offered interest rates can have a substantial impact on your bottom line, so it is crucial to not take the first loan that’s offered to you.
Let’s look at an example.
If lender X is offering you a 6% interest rate on a $35,000 auto loan with a repayment term of 60 months, your monthly payment will be roughly $677 with a total cost of about $40,600. Lender Y offers you the same loan at a 4.5% interest rate, resulting in a monthly payment of roughly $653 and total cost of $39,150. That’s nearly $1,500 in savings over the life of the loan – money you can put to use elsewhere.
Without shopping around prior to buying a vehicle, you might be stuck paying quite a bit more for no real reason. Make sure to check comparison websites online, other dealerships, and with your primary bank or local credit union to ensure you’re getting the best deal.
You can use our online payment calculator to see how much car, truck, SUV, van, or other type of vehicle you can afford.
3. Leverage a Larger Down Payment, Trade-In, Something Else
In some cases, lenders will reward you with a lower interest rate when you bring something aside from your good to excellent credit to the table.
For instance, being open to shortening your loan term from 60 months down to 36 months may be more attractive to a potential lender, giving them some incentive to reduce your interest rate.
Similarly, dealerships may be keen on lowering dealer-financed interest rates when you come up with a higher down payment or have another vehicle to trade-in as a down payment. Just be sure to know how much your vehicle is worth before bringing it in to ensure you understand its value and get the most money for it.
All of these things can help you push that interest rate down, especially wehen applied together.
Final Thoughts on Getting the Best Auto Loan Interest Rate
Financing a new automobile purchase is a necessity for most car owners but paying an arm and a leg for your loan is not a requirement. To make sure you get the best auto loan interest rate available, start with looking in the mirror. Work toward improving your credit history and score if necessary before you ask any lender for a new loan.
Remember to shop out multiple loan offers before making your final decisions and be prepared to offer flexibility as it relates to your loan term or down payment. Each of these factors plays a big role in getting you an interest rate that fits best into your overall financial needs.
I like that you encourage readers to bring an incentive with them when they’re applying for a car loan. After all, lenders are more likely to take you seriously if you have something other than just good credit. As the article points out, a shortened pay back period is a good offer, but something like having already paid off a car loan in the past can help out too.