Car loans may seem relatively simple, but taking out a car loan is a big commitment and can put you under significant financial pressure, so it is always best to be informed. In fact, there are many simple strategies you can employ to ensure that you’re getting the best interest rate and loan terms to suit your financial situation and credit rating:
1. Do your homework
If you need to use car financing, shop around so you know the interest rates charged by various banks, dealerships, web-based auto loan companies, and other lenders. Only then should you start shopping for your future car. If you want to go with dealer financing, it’s important to understand the rates so you don’t get overcharged. If you have pre-approval from a bank, learn the market rate. This puts you in a better position to negotiate the interest rate, even if you decide to take a dealer loan. Doing your homework will allow you to know beforehand how much you will need to spend and make decisions accordingly.
2. Maintain a good credit score
The interest rates on loans are usually based on your credit rating, and car loans are no different. A good credit rating is the most important factor, as it dictates the interest rate you will be charged—the better your credit score, the lower the interest tends to be. Your credit score not only has a huge impact on your interest rate, but it also affects other terms of the loan, like its duration. Hence, knowing your credit score and how lenders will perceive it is a crucial part of shopping for your loan.
3. Limit the loan term
Loans are always cheaper if you can pay them off in a shorter amount of time. Though it might be tempting to go with a longer loan duration, since the monthly installments are lower, consider instead how much you’ll pay overall. For example, if you’re taking a loan of $20,000 with an APR of 5% for three years, your interest payment will be $1,579. However, it will climb to more than double that ($3,745) if you had opted for a seven-year payment plan.
4. Try 0% interest loans
No bank or credit union offers loans without interest. However, sometimes lenders do offer car loans at 0% interest, which you may be able to get at the dealership if you have an excellent credit score. However, you may have to turn down a considerable cash discount on another promotional offer. So, do the math and figure out whether the lack of interest will help you save more than the cash discount. If not, you may want to go for a low-interest loan instead and take the discount.
5. Consider buying a new vehicle
It is a known fact that new cars carry lower interest rates than used ones. Average rates of interest for a used car can be considerably higher than for an equivalent new car. One of the main reasons behind this is that people seeking car loans for used cars tend to have lower credit scores than people shopping for new cars. Sadly, cars tend to lose their value immediately after owners take possession of them. As a result, people prefer to buy used cars, even with their higher interest rates. Even if you want to buy a used luxury car, buying a new mid-range model with a low interest rate can save you more money in the long run.
