With the average price of a new car reaching $36,000 in December 2022, it’s more important than ever to negotiate favorable terms when taking out an auto loan. One of the most important terms to consider is the interest rate, which is the fee you pay for borrowing money. Interest is calculated as a percentage of the amount borrowed, so the rate you get has a big impact on how much you have to pay back. This article explains how to get the best auto loan rate when it’s time to buy a new vehicle.
Get Your Credit in Order
When you apply for an auto loan, one of the first things the lender does is check your credit score. The lower your score is, the more difficult it is to qualify for credit. Even if your application is approved, you may have to pay a much higher interest rate than an applicant with a higher score.
If your score is lower than you’d like, consider waiting a few months to apply for an auto loan. Waiting gives you extra time to build your credit profile or recover from past financial mistakes. For example, if you have a late payment that’s about to fall off your report, your score is likely to increase in the near future. A little patience can help you qualify for better loan terms.
Tips for Improving Your Credit
FICO scores are based on these five factors:
- Payment history: Paying bills on time is one of the most important things you can do to keep your credit score as high as possible. Missed payments and late payments have a drastic impact on your score.
- Amounts owed: Having a large amount of debt can also knock points off your credit score. If you owe a lot of money on your credit card or loan accounts, banks, credit unions, and auto finance companies may hesitate to lend you money.
- Credit mix: Having multiple types of credit shows lenders that you can manage your finances responsibly—as long as those accounts are in good standing, of course. Your score may be higher if you have a credit card, a personal loan, and an auto loan than it would be if you just had one or two credit cards.
- Length of credit history: The longer you’ve been using credit, the higher your score is likely to be, provided you have good financial habits.
- New credit: Opening several new accounts in a short period of time can hurt your score.
To improve your credit, pay close attention to the first two factors—payment history and amounts owed. If you’re late on any payments, get caught up as soon as possible. Work on paying off some of your credit cards or loans to reduce the amount of debt you have. If you’ve been making payments on time, continue doing so.
Explore Your Financing Options
If you don’t already have a lender you trust, take time to explore your options. When it comes to auto financing, you can work with a bank, a credit union, or an independent financing company to borrow the money you need for a new vehicle. Gather as much information as possible about each lender, such as what loan terms they offer and how much of a down payment they expect. Once you narrow down your list of options, look up each lender on the Better Business Bureau website or look for online reviews to help you determine if they’re trustworthy.
Focus on the Amount Borrowed
When shopping for an auto loan, many people make the mistake of focusing on the monthly payment. What you should do is look closely at the annual percentage rate, the loan repayment term, and the auto loan rate. These factors have a big impact on the total cost of your new vehicle. If you focus on the monthly payment amount, you may end up paying way more in interest or borrowing more than you can truly afford.
Take a Strategic Approach When Applying for Credit
A hard inquiry appears on your credit report every time you apply for a new loan or credit card. Too many hard inquiries hurt your score, as they may indicate that you’re having financial difficulties and applying for multiple accounts to try to get caught up on your bills. If you don’t want to hurt your credit score, submit all loan applications within a 14-day period. When you submit them so close together, the scoring models view them as one inquiry instead of multiple inquiries, reducing the impact on your score.
Understand What You’re Getting Into
Before you sign on the dotted line, make sure you understand the terms of the loan. Read the loan documents carefully and make a note of any prepayment penalties, arbitration requirements or processing fees. You’ll need to follow this agreement for several years, so it’s important to understand what it says and know how it affects your financial situation.
If you’re in the market for a new vehicle, price is probably one of your top concerns. While you’re shopping, don’t forget to consider how the auto loan rate will affect your total cost of borrowing. Shop around to find a lender that offers reasonable loan terms and is willing to work with your credit history.
FAQs about Getting the Best Auto Loan Rate
Still have a few more questions about getting the best auto loan rate? We’ve got you covered.
Is it possible to get a better rate on a dealership loan than from my bank?
Yes, it is possible to get a better rate on an auto loan from a dealership than your bank. The most important thing is to compare rates from multiple sources, not just the dealer and your bank. Keep in mind that some dealerships may also offer discounts for first-time buyers or those with certain credit scores.
Can I negotiate the interest rate on an auto loan?
Yes, you can negotiate the interest rate on an auto loan. It is important to do your research beforehand to have a good idea of what other lenders are offering, so you are in a stronger negotiating position. Additionally, having good credit will give you more bargaining power when it comes to getting a lower interest rate.
Does my credit score affect my ability to get a good rate on car loans?
Yes, your credit score has a major impact on the interest rate you will receive for an auto loan. Generally speaking, if you have good credit, then you should be able to negotiate for better terms, including lower interest rates and longer repayment periods.
Should I look for special deals or promotions when shopping for an auto loan?
Absolutely! Many dealerships offer special deals or promotions at different times throughout the year, which can help make financing more affordable. It’s always worth looking out for these deals as they can really help save money over time.
Are there any fees associated with an auto loan that I should be aware of?
Yes, there are several types of fees that could be associated with an auto loan, such as origination fees and prepayment penalties, among others. It’s important to read through all paperwork thoroughly before signing and understand exactly what type of fees are being charged so that you’re not caught off guard later on down the line.
Your automobile is one of the biggest investments you’ll make, aside from your house and possible college education. Therefore, it’s important you get the best auto loan rate possible. Be sure to take the time to build your credit and check out all your financing options before going to the dealership—you won’t regret it.