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Before you buy your next ride, be sure to check out this article on how to get the best auto loan rate. Your wallet will thank you.
Shopping for Your Best Auto Rate? Use our Guide to Help Save Money
Whether you’re buying a new or used car, if you plan to finance the purchase, your wallet will thank you for taking the time to learn how to get the best auto loan rate. Negotiating the price of your next ride is certainly an important aspect of this process. However, interest rates, which have been on the rise, and loan terms are just as critical in the long run. So, let’s dive into some tips on navigating this process.
Know Your Credit Score
When it comes to securing an auto loan, the interest rate is driven by your credit score. This is illustrated by a recent Experian report showing an average interest rate of 3.84% on new cars for borrowers with credit scores over 780. That figure balloons to 10.11% for those in the 500-600 range.
So, find out where you stand before applying for a loan. If your score is on the low side and you have some time, work on driving that number up by paying down existing debt and avoiding new credit applications.
Auto Loan Rate Research
You can secure an auto loan from a wide variety of sources including brick-and-mortar banks, online lenders, and credit unions. The interest rates and terms each offer can vary widely, so do your research upfront. The Wall Street Journal recently reported – using Experian data – that credit unions tend to offer dramatically lower auto loan rates versus traditional banks.
For new cars, credit unions are currently averaging a 4.43% rate versus 6.06% from a bank and that gap widens on used car loans. You can use free online auto loan calculators like the one we offer here at Carsforsale.com to get a sense of how much you’ll pay per month.
But be sure to focus on the total amount you plan to borrow versus a longer loan term that results in a lower monthly payment. That latter approach will lead to more interest being paid over the life of the loan.
Shop Around for Your Best Loan Rate
With your credit score where you want it and a general understanding of current interest rates that you’ll qualify for, you should shop for a loan from at least three different lenders. You’ll want to obtain a quote as the APR advertised on a lender’s site can vary from the rate you qualify for.
With the quotes in hand, compare the interest rates and repayment terms. Loan repayment periods have continued to increase with 7- and even 8-year terms becoming more prevalent as we look at here. This serves to drive the monthly payment down but will increase the total amount you pay for the car with additional interest.
This all assumes you plan to obtain an auto loan before heading to the dealership. Should you prefer to secure financing at the same place you’re buying the car, be aware that the benefits of dealer finance are few. Though it is convenient as the sales folks handle all the paperwork, they are acting as a middleman making it likely that you will pay quite a bit more.
Make Sure to Read The “Fine Print” on Your Auto Loan
Before signing on the dotted line, it’s important to scour the fine print of your new auto loan. It’s here that you’ll find details on important aspects like binding arbitration, prepayment penalties, and other fees. Binding arbitration is a legal way of preventing you from suing the lender should things go sideways.
Some loans hit you with a penalty for paying down your loan faster than agreed upon and watch out for unexpected fees. Considering this loan will be attached to you for the next 4 years or more, you want to be aware of what you’re agreeing to.
Additional Thoughts on Getting Your Best Auto Loan Rate
Some other considerations when looking into how to get the best auto loan rate is enlisting a co-signer. We discuss the pros and cons of this approach here.
If you’re struggling to obtain the interest rate and terms you want, you can consider auto loan refinancing down the road. This is an option for re-casting the terms of your loan that can be handy if you expect to improve your credit score over time in order to secure a better rate.
