Buying a used car is generally cheaper than buying a new car, but if you're like most people, you still don't have enough money set aside to buy a used car outright. So, you'll need to look into financing your purchase. Many car dealerships, banks, and credit unions offer auto loans, but the rates can vary greatly. And while the difference between a 2% and 4% loan may sound negligible at first, it can add up to thousands of dollars over the life of your loan.
To ensure you don't pay more than you have to for your car, follow these tips to get the best rate on an auto loan.
Tip #1: Apply to several lenders.
When you fill out a loan application, the lender will typically ask for information about your income, your length of employment, and your credit score. They will use this information to determine how risky it is to lend to you. And then based on that risk, they will offer you a rate. The less risky you seem, the lower the rate they'll offer.
Different lenders calculate "risk" differently. Some may look primarily at your income, while others may focus solely on your credit score. As a result, one lender may see you as less risky and offer you a low interest rate, while another may see you as more risky and offer you a higher interest rate. So, it really pays to apply at several lenders and then compare the rates they offer. Try to apply at a few different types of lenders, such as one big commercial bank, a dealership lender, and a private bank.
Tip #2: Get your credit in good shape, first.
Most lenders do weight your credit score heavily when deciding what interest rate to offer you. So, it pays to check your credit score before you start applying for loans. Your credit score is a number between 300 and 850. If your score is between 740 and 799, it's considered very good, and if it is above 800, it's exceptional. Any lower than 740, and you may want to work on improving your score before you apply for a car loan -- assuming you can wait a few months to buy that car.
Some things you can do to improve your credit score include:
- Making all of your payments on time every month
- Paying off some smaller loans
- Using your credit card (and paying it off) if you do not usually do so
Tip #3: Don't rule out personal loans.
If you are having trouble getting a reasonable rate on an auto loan, consider applying for a personal loan through your bank instead. Sometimes, banks may simply offer lower rates on personal loans than on car loans. With a person loan, you can typically spend the money on anything you please -- you'll just be spending it on a car. As with an actual auto loan, make sure you apply to several lenders to get the best rate possible.
Tip #4: Have a down payment ready.
You may see some lenders boasting about offering auto loans with no down payment required. But while these loans do exist, they rarely offer as good of a rate. If you can save up a few thousand dollars to use as a down payment, you stand a better chance of getting a good rate. Even having $500 to set aside as a down payment is better than having nothing!
If you follow the tips above and exercise some patience, you'll have an easier time of finding an auto loan at a rate you can afford.