Using Your Credit Rating to Negotiate a Lower Used Car Loan Interest Rate

Your credit rating is the best assurance you can provide in order to negotiate a better used car loan rate. Your credit is a measure of how you have performed on all previous debts. A borrower who has never missed a payment has shown lenders he or she takes the obligation of debt very seriously. This type of borrower will typically value his or her credit score enough to make sure a loan is paid even in an emergency. Showing you are this type of borrower allows a lender to extend you better options.

Risk and Interest Rate

Interest rate is set by the lender to compensate for two major factors: inflation and risk. You cannot control inflation. When inflation is high, the national prime interest rate will be high, and your car loan will cost more. Even though you have no control over this, however, you do control the other primary factor: risk. A lender must charge more for a risky loan in order to earn the principal on the loan back faster. Further, a lender knows a high risk borrower has fewer options, which may lead a lender to falsely inflate rates. If you have a good credit score, you will have options, and you remove risk from the loan.

Negotiating an Auto Loan

When a lender provides a loan quote, the lender is hoping you do not want to negotiate. Surprisingly, few borrowers actually negotiate a loan rate. It is common for borrowers to negotiate a car's price or a trade-in's value, but they often accept the loan terms a lender offers. Instead, these borrowers should come to the loan meeting ready to bargain. Know your credit score, know the national prime interest rate, and seek at least three loan quotes. You will often surprise the lender when you come with this knowledge, opening the door for negotiation.

Using Terms to Negotiate

Interest rates on car loans do not exist in a bubble. They are subject to change with the terms of the loan; for example, a longer loan will typically have a higher interest rate. If you know how these factors work, you can more effectively bargain. A lender may tell you the long loan has a higher rate because the risk is higher. Using your credit score as proof, you can show you are a low risk borrower regardless. This means you could possibly secure the long loan with low monthly payments without paying a higher interest rate.

Walking away from a Bargain

Ultimately, the only way to assure you are getting a good deal on an interest rate is to know when to walk away. If you have prepared your research, you know the options you have available. A lender who is unwilling to negotiate based on your credit score should know you will turn away from the bargaining table and go to another lender. High risk borrowers do not have this option, but you do. Make sure you tell the lender you are aware of other options to put more pressure on the lender to make a deal work for you.

blog comments powered by Disqus