5 Ways to Save Money on Your Auto Loan
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- By Jennifer Calonia
- November 25, 2012
Shopping for a new car can be an exhilarating experience. There is nothing like the promise of a smooth ride and new car smell to fully intoxicate car-shopper’s senses.
Aside from these new-car owner perks, consumers know that they can’t get something for nothing. The down side of having a new vehicle purchase is having to pay excessive auto loan rates, in addition to repaying the principal balance on a car loan.
One way to make the bitter pill of parting with your money easier to swallow is saving money on your auto loan rates by considering a few simple strategies that help you get the lowest auto loan rates available.
#1. Boost Your Credit Score
Before shopping for a large ticket item like a car and applying for a line of credit toward a loan, take the time to review your credit score. The simple fact is the higher your FICO score is, the lower the interest rates offered to you will be. Auto loans for bad credit customers are far from desirable, with some rates reaching upwards of 20% APR.
Addressing a lackluster credit history before submitting a car loan application will not only help you earn lower auto loan rates, it will also prevent your credit score from dropping lower due to a credit inquiry.
This process may take some time, depending on your credit history, but it’s well worth the effort. Borrowers with prime credit scores of 720 or more find greater savings into the hundreds or even thousands of dollars of the total cost of auto financing.
#2. Increase Your Down Payment
One of the best ways to save money on auto loan rates is to raise your anticipated down payment amount. Providing dealerships with more hard cash upfront reduces your liability as a high-risk borrowers, especially if you have bad credit.
The industry standard for a down payment is 20 percent of the purchase price. For example, if the car you’re interested in buying costs $25,000, a good down payment to offer is $5,000 — and the higher you can reasonably apply toward the down payment, the better.
A higher down payment gives you more leverage to negotiate for a low car loan rate, and also saves you money in the long run since the total interest charged on the principal loan balance will also be reduced as a result.
#3. Get a Pre-Approved Car Loan
Getting pre-approved for an auto loan prior to entering a dealership boosts borrower’s buying power instantly and reduces the pressure of being talked into exorbitant auto loan rates by the dealership’s financing manager.
Arming yourself with your own means of cash — either through a local bank or credit union whose loan rates are typically lower than commercial institutions — can help lower the overall costs associated with high interest rates.
However, this route requires you to shop around and do research ahead of time. For instance, you’ll need to know exactly what your monthly budget is, what you can afford, the car you’re interested in buying, and its average selling price.
The key point to remember is that you’re in no way limited to taking out auto loans from the financial institution you do your deposit banking with. Explore what smaller banks and nonprofit credit unions can offer you in terms of the most affordable auto loan rate and terms — chances are you’ll find a great deal compared to financing through a dealership.
#4. Lease a Vehicle
If after crunching the numbers and researching all your options you find that buying a new car is not financially sound for your particular situation, leasing a car may be a viable option.
Leasing a car means you’re not purchasing the vehicle, so payments and interest rates are typically lower compared to the cost associated with buying a new car.
This is also a beneficial option if you easily get bored of your vehicle. Leasing contracts are typically for about 2-3 year terms. At the end of the term, drivers are able to lease a newer vehicle after returning the previous car to the dealership.
#5. Refinance Existing Auto Loans
An auto loan refinance gives borrowers a second chance at getting affordable auto loan rates. If you already have an active auto loan, but were locked in to a high interest rate, you could save a considerable amount of cash by refinancing.
Ideally, you’ll want to refinance at a lower car loan rate to save money on accruing interest charges, however, this method can also be used as a way to reduce auto loan monthly payments by extending the auto loan’s repayment term (i.e. the number of years you have to repay the entire loan).
By employing these options, you can start chipping away at the cost of your auto loan, and start truly enjoying your new ride.