Getting A Better Interest Rate
Getting a good interest rate on an auto loan is about more than just your credit score. Sure, you want to have the best credit rating that you can but there is more to it than that. Take a look at a few tips that can help to shave a few points off of the rate that you are offered.
1) Choose The Right Vehicle
Every vehicle out there will not come with the same interest rate. You might think that a 30000 dollar auto loan is a 30000 dollar loan but this is not the case.
Lenders set the rates that they offer based on the risk that issuing the loan entails. They look at your credit, how much you are putting down, the loan term and often, the specific vehicle that you are buying.
If a vehicle has a history of poor reliability or poor resale value, it represents a larger risk to the lender. If the vehicle breaks down, a borrower is more likely to default on a loan. If a vehicle has a lower resale value, it would be harder for a lender to offset their losses should the borrower default.
Choose a vehicle that has been proven reliable and that has a historically high resale value and you may be able to secure a lower interest rate.
2) Put More Money Down
This is another big factor in determining what interest rate that you get. Typically, the more that you put down, the lower that your interest rate will be. This goes back to limiting risk for the lender.
If you put more money down, you will be less upside down on the loan. If the lender should have to repossess the vehicle, they would be able to get back all or at least more of their money. A borrower is also more likely to continue paying on a vehicle that they are not thousands of dollars behind on.
Shoot for putting 20 percent down on a vehicle to get the best rate. This is enough money, in most cases, to counter the initial depreciation that vehicles face. So, if your new vehicle is 20000 dollars, you need 4000 dollars in cash as a down payment.
3) Ask For A Lower Rate
Sometimes getting a better rate is as simple as asking for it. If your bank or a lender quotes you a rate, ask for a lower one. It never hurts to ask and the worst that they can say is no.
Asking for a lower rate from a lender is a generally good idea if you are working directly with a bank. If you are working with a dealership though, it is a necessity.
Dealerships are notorious for adding several points to an interest rate. It allows them to make money not only on the sale of the vehicle, but also on the financing. Unless you have secured a 0 percent interest promotion, when a dealership quotes you a rate, always ask for a lower one. Even just a point lower and you can save thousands of dollars.
4) Finance For A Shorter Time
Longer terms are much riskier than short terms. With a long term, the borrower is paying more interest than principal. This can make it much harder to gain equity in a vehicle. This also means that if the lender would have to seize the vehicle, they would likely be seizing a vehicle that is worth less than is owed.
Loans these days can have terms as high as 96 months. With such a loan, it is unlikely that the borrower would have any equity in the vehicle for at least 4 years. That is risky which is why these longer term loans come with a much higher interest rate.
Try to finance a vehicle for as short of a term as possible. At most, you should be financing for 60 months. If you need a longer term to make the loan affordable, pick a cheaper vehicle instead. That or save more money for a larger down payment.
Taking out a long term vehicle loan will not only get you a higher interest rate, it is asking for trouble.
5) Get A Cosigner
If all else fails, and you are only being offered higher rates, consider a cosigner. If you have no credit or have had credit problems in the past, it might be the only way to get a decent interest rate.
When using a cosigner, you are essentially piggy backing off of another persons good credit. The cosigner is agreeing that they will take on just as much of the loan obligation as you. You make the payments but if you default, the lender has another person that they can go after for their money.
Be careful when looking for a cosigner. Cosigning a loan is a serious matter and you should be careful not to pressure someone into doing something that they do not want to do.
6) Make More Money
Besides credit, the debt to income ratio can be a major factor in what kind of rate that you get. If you made more money, you would have a more favorable debt to income ratio.
Everyone obviously wants to make more money, that should be a given. What you need to do is show the lender that you make more money. If you anticipate looking for an auto loan several months from now, a part time job could allow you to claim thousands of dollars more in income on your application.
In addition, be sure to think about all of the extra income that you make. This could be from child support, an investment account or any side gig that you have. Try to be as thorough as possible so that all of your income is counted.
As you can see, there is a lot more to an interest rate than just a credit score. You have to think about things from a lenders perspective. All that they are worried about is mitigating risk. Make the loan less risky for them and they are likely to pass some savings on to you.