4 Tips for Getting the Best Auto Loan Rates

While a lender ultimately determines your interest rate, there are a number of steps you can personally take to secure the best auto loan rates. Your credit is important. If you have bad credit, you may want to wait a year or two prior to taking a car loan in order to fix this problem. A bad credit score will prevent you from securing the best rates. Aside from improving your credit, try these tips for getting a good rate.

#1 Place a Large Down Payment

Placing a large down payment has two benefits to your rate. First, it lowers your overall loan size. For example, if you would like to purchase a $20,000 car and have $2,000 down, you will be financing $18,000. If you place $10,000 down instead, you are financing only $10,000. A smaller loan can be paid off faster, reducing your interest rate. Second, in the first scenario, you are financing 90 percent of the loan cost. In the second, you are financing only 50 percent. By placing this large collateral on the loan, you give the lender added assurance that you will not default, lowering the risk of your loan and therefore lowering the cost.

#2 Opt for a Short Loan

The shorter your loan, the better your interest rate. With a short loan, there is a lower chance you will default, and the lender can reward this lower risk with lower rates. Further, the lender does not have to worry about inflation cutting into earnings. As a result, the lender can further reduce your rate. Most car loans are available in 3-, 5- and 7-year terms. By opting for the 3-year loan, you can save thousands of dollars in interest payments.  

#3 Shop Around

Different lenders will quote different interest rates. A large difference in rates may occur when you receive a quote from a bank versus a dealer finance company. Dealers often have incentive to lower interest rates: they want to make a sale. However, dealers are also more likely to make up this cost on the back end, charging you money if you wish to repay the loan early or refinance in the future. A bank makes these tasks more affordable, but the bank has less incentive to offer you a low rate. Shop around and compare these loan features to determine which loan fits your needs best.

#4 Get Creative

You can change your loan terms in order to reduce your financing costs. Down payment and loan length are just two critical terms on the loan. You can also change your insurance requirements, add additional collateral or add a cosigner. Remember: you should aim to balance your interest rate with these other options. Going for the best rate alone without considering your financing terms is not a good idea. However, using your financing terms for leverage can help you reduce your rate and still have an affordable loan that is easy to pay off in the future. 

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