Getting the lowest auto loan rate possible is one of the most important steps of the car-shopping process. However, the terms of a car loan can be overlooked when you are searching for the perfect car at the right price. And if you aren’t informed, it can cost you big, especially when you choose dealer financing.
According to a study from the Center for Responsible Lending, some dealerships mark up the interest rate the borrowers’ credit qualifies them for. Dealers view this markup as compensation for the time they spend making the deal and processing the car loan, but for buyers, it is essentially a hidden cost. The average rate markup on dealer financing was 2.47%, and cost the average consumer $714.
When shopping for auto loan rates, being informed and knowing what rates you qualify for will help you save money — especially when you are financing your auto loan through a dealership. Don’t fear, there are ways to get a lower rate on an auto loan financed through a dealership!
How Dealer-Financed Auto Loan Rates Are Determined
According to Cars.com, dealerships use multiple factors to determine interest rates for auto loans:
- The lender the car dealership works with. Depending on which bank or credit union the automaker is partnered with, the rates offered can vary.
- The type of car and the vehicle’s model year. Brand new cars generally receive the lowest rates. Auto loans for used cars generally come at higher interest rates. Also, the older a car is, the higher the interest rate offered.
- The loan’s term. While automakers have recently extended zero percent financing to longer-term loans for promotions, generally speaking, the longer a car loan, the higher the interest rate.
- The borrower’s credit score. As with any loan, customers with impeccable credit are given the lowest auto loan rates. However, according to the Consumer Federation of America, only 15 percent of all car buyers are able to get this rate from dealer financing.
How to Get a Lower Rate on an Auto Loan at a Car Dealership
To guarantee that your dealer offers you the lowest car loan rate, you need to know how to get a lower rate on an auto loan. Knowing how to negotiate with your car dealership is key to getting the best rate for your next car purchase.
Research Alternate Financing Options Available
Before you go to the dealership for your financing, shop around and apply for auto loans at local banks or credit unions. Doing your own homework to see what car loan rates are available for you will let you know how competitive your car dealership’s loan interest rates are. After you get a loan offer from your dealership, you can compare the rates and counter the car dealership’s loan offer with the lower rate you’ve been preapproved for from a third party bank or credit union.
Ask For A Lower Interest Rate
If dealership financing is your only option, then negotiating might be the best way to get a lower rate on an auto loan. If you feel the interest rate is too high, you might be offered a lower interest rate simply by asking.
Increase Your Down Payment
The larger the car down payment you can afford to put toward your purchase, the lower your car loan rate will be. The less money the lender risks, the more comfortable it will be loaning it out. This translates into the lender rewarding your responsibility with a lower interest rate. The ideal car down payment is at least 20 percent of the projected loan amount.
Keep Your Loan’s Term Short
Signing up for the shortest auto term possible reduces the interest paid over the life of the loan. Allison Vail from LendingTree.com illustrates this point perfectly. She compares a three-year and six-year auto loan for $22,000 at 5%. The three-year loan will cost a borrower $23,737 with finance charges compared to $25,510 for a six-year loan. The three-year difference between the loans will cost a borrower an extra $1, 737.
Set Up Automatic Payments
Depending on the loan company your obtain your financing from, you might be able to reduce the rate with automatic car payments. By setting up an automatic withdrawal from your checking or savings account, some lenders will reduce the interest rate due to heightened confidence that payments will be made on time.
Ask About Promotions
During your negotiations, ask the car dealership about any financing incentives that are available. Depending on the eligible car models, you might be able to take advantage of zero or low car loan interest rates.
Don’t Take the Dealership’s First Offer
If you feel the interest rate is too high for your auto loan, don’t sound too eager to settle for the first offer. Lenders who sense borrowers are eager to get a loan will be less likely to negotiate an auto loan rate. If you are not prepared to walk away from the offer, tell the car dealership you have to think about it.
Staying firm, being educated and not settling for the first offer can help you negotiate for a lower interest rate.
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