It’s hard enough finding the car of your dreams; it’s even tougher to figure out if you’re getting the best auto loan rate available to you. But ensuring that you get the lowest interest rate out there can have a major impact on your overall financial health.
The trick is to figure out how to get the best car loan rates. Unfortunately, this isn’t an overnight process. The first step is to understand what factors impact the rate you finally get offered.
There are essentially three factors that come into play: credit history, the term of the loan and the loan-to-value of the vehicle.
1. Credit History
This is the big one. Credit history will have the largest impact on the rates you are offered. The best auto loan rates are advertised with good-credit borrowers in mind. Falling short of these standards will cause the rates you are eligible for to be much less appealing.
Despite what a lot of credit repair companies say, there is no quick fix for bruised or damaged credit histories; however, you can take some immediate steps to pay off debts and get everything in your credit file up to date. After that, it is simply a matter of time and consistency to ensure that you once again are getting the best car loan rates available from the financial institution or dealership you borrow from.
2. Term of Loan
The shorter the term, the lower the rate. Keep this in mind when you are purchasing a new vehicle. The balancing act here is making sure you can afford the payment. A two-year loan rate might seem attractive, but if the payment is too much to handle opt for a longer-term loan. That said, if you feel you can swing a three-year payment instead of a five-year payment, paying less over the life of the loan could be worth a short-term loan.
It’s important to consider lifetime costs of a loan when determining the term, however, we all have budgets we need to keep in mind and opting for a larger monthly payment you can’t afford will only cause you to fall into debt on borrowed money.
This is more black-and-white than the first two factors. Typically, a lender will identify some sort of cut off with regards to loan-to-value, and all loan requests that fall over that mark will be subject to higher rates. Coming up a with a larger down payment can help keep you under that line.
These other factors are good to keep in mind when financing a new car:
- Time of day: It’s said that the time of day you go to the car dealership can impact the leverage you have when negotiating.
- Time of year: Visiting the dealership when next-year’s models are hitting the floor can help you reduce the cost of your car — and hence your loan’s total value.
- Dealership vs. financial institution financing: Where you get your auto financing makes a big difference. Compare local banks and community credit unions before settling for dealership financing.
- Beware auto loan rip-offs: Predatory loans are definitely a thing. Be mindful of discrimination in the lending industry to avoid becoming a victim.
As a final tip, always get financing beforehand. Even if you end up going with dealer financing, it will you leverage during the car-buying process.