Auto loan debt reached a record full of the 3rd quarter of 2023, based on Experian research, using the average auto loan surpassing $20,000 for the first time.
Now, it's more important than ever to complete what you can to entitled to the best car loan rates when buying a brand new or car or truck. Some of the steps to complete that goal include improving your credit, looking around, putting more income down and selecting a shorter repayment term.
1. Look at your Credit
Before you begin taking a look at cars, you need to have an concept of your present credit health. You can check your credit score and review your Experian credit history free of charge to gauge how good your credit report stands up, and also pinpoint areas that you could address to enhance your credit rating.
This task is crucial because it lets you know that which you have to work with. In case your credit score is 670 or over, it's considered good and can help you qualify for a great interest rate, but when you want access to the best auto loan rates, your best bet would be to possess a good or exceptional score, which translates to a 740 or higher.
2. Take Steps to enhance Your Credit Score
Your credit report will inform you of the different ways you are able to improve your credit rating, but here are a few guidelines that can help you decide how to proceed:
- Pay all of your bills on time and get caught up on past-due payments.
- Pay off any collection accounts you might have.
- Work to pay down your credit card debt to take down credit utilization rate.
- Limit applications for other credit accounts.
- Review your credit score and file a dispute using the credit bureaus if you find errors or fraudulent activity.
Observe that there are several credit history items you might not be able to fix. For example, missed payments stick to your credit report for seven years, and if they're legitimate, you can't take them off.
If you have some past items which you cannot address, focus on what you could control before you decide to apply. As the credit improves over time, you can refinance the car loan later on.
3. Compare Lenders
It is common for car buyers to let dealers arrange their financing, that involves submitting your credit application to multiple lenders. But that may not help you get the best rate available to you, especially if the dealer adds an amount to pay themselves to take proper care of the financing for you personally, thereby increasing your rate.
Fortunately, some auto lenders allow you to get prequalified before you decide to submit an application, letting you gauge what rates of interest you might receive, and this process doesn't involve a hard credit inquiry.
Other lenders may require you to definitely submit the official application, but when you complete your rate-shopping process within 45 days, FICO's newest credit scoring models will combine all of those inquiries into one for credit-scoring purposes.
As you compare interest rates, repayment terms and other features, you can narrow down your list of options to the best bargain available.
4. Put More income Down
Lenders think about a number of factors when determining car loan rates, and one of these is when much you're borrowing. A higher amount borrowed means a higher monthly payment, which could increase the chances of default.
As a result, you may qualify for a better interest rate should you put more income recorded on the purchase. Before you decide to drain your savings, though, think about the way a larger deposit could affect you in other ways.
For instance, let's imagine the sales price of a vehicle you want to buy is $30,000, and you are considering a 60-month repayment term. A $10,000 down payment could get you an interest rate of 3.49%, providing you with payments of $363.75.
But $10,000 is all you have in your savings account, causing you to be vulnerable to financial emergencies that could show up. Should you pay $5,000 instead, the lending company may offer a 3.74% rate of interest, giving you a monthly payment of $457.49.
That's almost $100 more monthly, but when you can afford it, it might be worth it to keep an economic buffer.
5. Request a Shorter Repayment Term
Another factor lenders consider when determining interest rates is the entire repayment term. Shorter repayment terms are more favorable for lenders because it cuts down on the risk that interest rates will increase significantly on your loan term, and for that reason cuts down on the lender's opportunity price of lending you money.
Obviously, a shorter payment term means a higher payment per month, so be sure you can afford it without impacting other financial goals and obligations. However in the finish, it also means you'll pay less in interest.
The Bottom Line
Qualifying for the best auto loan rates can take time, particularly if you have made some credit missteps in the past. However the effort is worth it when it can help you save hundreds or even thousands of dollars in interest charges.
Thinking about buying a car soon, take time to work through these steps to enhance your odds of securing a low interest rate. If your situation is urgent, you might not have time to complete everything, but do around you are able to to maximise your savings.