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If you're like the average American, chances are you buy a new car every five years or so. Most people need an auto loan when they purchase a new vehicle, whether it's a car, truck, SUV, or van. Since the interest on auto loans can add up over time—especially on a five or seven-year loan!—it's crucial to secure the lowest rate possible on your car loan. Here are three effective ways to find a low-rate car loan:
1. Get Your Loan Before You Shop
Why It Matters
If you wait until you get to the car lot to think about financing, the dealer will try to push "dealer financing" on you. Dealer financing often comes with extra "padding" to make you pay more and to boost the dealer's bottom line. The interest rate on dealer financing is frequently 3% higher than financing from a bank, credit union, or online loan company.
Steps to Take
- Research Lenders: Start by researching various lenders before you even set foot on the car lot. Look into banks, credit unions, and online loan companies.
- Pre-Approval: Apply for pre-approval from multiple lenders. Pre-approval not only gives you an idea of the interest rates you qualify for but also strengthens your negotiating power with car dealers.
- Negotiating Power: With pre-approval in hand, you'll have more negotiating power for the price of the car since the dealer knows you're a financially stable customer.
2. Know the Current Rates
Why It Matters
You'll never know if you're getting a good deal unless you know the going rates for car loans. Understanding the current rates allows you to benchmark any offers you receive and ensures you’re not taken advantage of.
Steps to Take
- Search the Web: Utilize online resources to find the current interest rates for car loans.
- Contact Local Banks: Call around to local banks and credit unions to get their current rates.
- Consult Friends and Family: Ask friends or family members who have recently purchased a car about the rates they received.
- Compare Terms: Be sure to compare apples to apples by considering factors like loan term since longer-term loans often have lower rates. Your credit history will also affect your rate.
3. Comparison Shopping
Why It Matters
Comparison shopping is one of the most effective ways to ensure you get the best deal. By getting quotes from multiple lenders, you can compare rates, terms, and fees to find the best overall loan package.
Steps to Take
- Gather Quotes: Get quotes from as many lenders as possible, including your current bank, credit unions, online lending services, and other loan companies.
- Compare Offers: Compare at least 3 or 4 different loan quotes. Pay close attention to interest rates, terms, and any fees associated with the loan.
- Leverage Offers: Let lenders know you are shopping around and that you have received better offers. This transparency can often lead them to lower your rate or drop your fees to win your business.
- Online Lending Services: Consider using online lending services that allow you to compare rates between multiple banks and loan companies at one time, providing a convenient way to shop around without multiple hits on your credit report.
Additional Tips for Securing a Low Interest Rate
Improve Your Credit Score
Your credit score significantly impacts the interest rate you'll receive. Before applying for a car loan:
- Check Your Credit Report: Obtain a copy of your credit report and check for any errors.
- Pay Down Debts: Reduce your overall debt levels to improve your credit score.
- Avoid New Credit: Refrain from opening new credit accounts in the months leading up to your car loan application.
Consider a Co-Signer
If your credit score is less than stellar, consider asking a family member or friend with good credit to co-sign the loan. A co-signer with a strong credit history can help you qualify for a lower interest rate.
Make a Larger Down Payment
A larger down payment reduces the amount you need to borrow and can lead to a lower interest rate. Additionally, it shows lenders that you are financially responsible, which can further reduce your perceived risk.
FAQ
Q: What is the difference between dealer financing and financing through a bank or credit union? A: Dealer financing often includes additional costs and higher interest rates compared to financing through a bank or credit union. Banks and credit unions usually offer more competitive rates and transparent terms.
Q: How does my credit score affect my car loan interest rate? A: Your credit score is a major factor in determining your interest rate. Higher credit scores typically qualify for lower interest rates, while lower scores may result in higher rates.
Q: Can I negotiate the interest rate on my car loan? A: Yes, you can negotiate the interest rate on your car loan. It's important to shop around and use offers from different lenders as leverage to negotiate a better rate.
Q: What are points, and how do they affect my car loan? A: Points are upfront fees paid to reduce the interest rate on a loan. One point equals 1% of the loan amount. Paying points can lower your monthly payments and overall interest cost, but it increases your upfront costs.
Q: Should I consider refinancing my car loan? A: Refinancing your car loan can be a good option if interest rates have dropped since you took out your original loan, or if your credit score has improved significantly. It can lower your monthly payments and reduce the total interest paid.
Conclusion
Securing the lowest interest rate on your car loan requires a proactive approach. By getting your loan before you shop, knowing the current rates, and comparison shopping, you can ensure you get the best possible deal. Additionally, improving your credit score, considering a co-signer, and making a larger down payment can further reduce your interest rate. Always be informed and prepared to make the best financial decision for your car purchase.