5 Ways to Avoid High Interest Auto Loans

High interest rate auto loans will cost thousands of dollars more, over their lifetime, than similar low rate loans. Many people think there is little they can do to actually affect the interest rate on their auto loan. It is true the market determines your rate to some degree, but you can change the rates you receive by taking simple steps to avoid high interest loans.

#1 Watch Your Credit

For at least one year prior to taking an auto loan, monitor your credit carefully. Aim for a score above 700 in order to be easily approved for most auto loans. If you have a very low score or have suffered a default in the past, you will have to start a little earlier to get these results. However, for most people, simply practicing responsible borrowing for 12 months, including making all payments and managing limits, will be sufficient.

#2 Save for Down Payment

The larger your down payment, the cheaper your loan. This part sounds easy, but few people provide enough down payment on their vehicle. Save for at least 20% down on a new loan. If you intend on purchasing a particularly expensive vehicle, saving even more is advisable. 

#3 Budget for High Monthly Payment

Shorter loans have lower interest rates. The lender assumes less risk on a short loan because the lender earns the money back much faster, leaving less room for potential crisis. Short loans require very high monthly payments. For example, a 3-year loan will often cost several hundred more each month than a 5-year loan. While this sounds like a lot of money, if you can afford it, it is worth the added money each week. You will have less interest assessed over a shorter time period.

#4 Seek Alternatives

For high risk borrowers, simple options like high down payments and high monthly payments may not be enough. Instead, these borrowers need to work hard to source a loan with beneficial rates and terms. Traditional banks and lenders are less likely to offer low rate loans to high risk borrowers. Online lenders, high risk lenders and even some dealers often offer lower rate loans. It is worthwhile to speak to a dealer directly because dealers have an additional incentive to reduce loan prices. A high risk borrower who has a high down payment is attractive to a dealer seeking to close a sale. These financing opportunities will be less expensive. 

#5 Walk Away

Ultimately, the best way to avoid a high interest auto loan is to know when to walk away. Borrowers who are set on purchasing a loan in a short period of time leave themselves less flexibility to walk away from a bad deal. Borrowers who realize they will have opportunities for lower rate loans if they are patient increase their chances of a good car loan. When a lender is not willing to negotiate a good price with you, you have the right to walk away from the bargaining table. You can find other lenders and other cars waiting for you elsewhere.

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