If you are looking for a car, you need to do your best to get the very best interest rate. Most people fail to pre-arrange financing when they go to the dealership. This is a huge mistake and leaves you at the mercy of the auto dealer. Did you know that car dealers make money on the financing as well? They do this by giving you a rate that is a few points higher than what you actually qualify for. If you know your rate before you go in, you are in a much better position. Even if you plan to use dealer financing, you will have a rate that they must beat.
So, the first step in looking for a vehicle is getting a loan offer so you can see where you stand. There are many online resources for getting a car loan such as this one from Capital One. And, no, we are not affiliated with capital one although I have used them for an auto loan before. They work directly with a lot of auto dealerships so the process is rather easy.
If you have a credit union that you are a member of, they are often an even better source for lending and can get you rates that are hard to beat.
What Is A Good APR?
So, what is a good APR and how do you know if you are getting the very best rate that you can qualify for? First, lets look at what an APR is.
The APR is the annual percentage rate and it is different than your interest rate. The APR takes into account all of the charges and fees associated with a loan and combines them with the interest to get a rate. This allows you to compare loans more equally because you will be able to see the true cost of the loan.
A Good APR
A good APR depends on a number of factors and what kind of vehicle you are looking at. A new vehicle, for example, will generally come with lower interest rates than a used vehicle. Also, the better your credit, the better your interest rate will be so a good rate for someone with average credit is a bad one for someone with great credit.
If you have good credit, a loan with an APR under 4% on a new car is usually good and under 5% on a used vehicle is also good. With average credit, rates under 8% on a new vehicle and 9% on a used vehicle should be good. With below average credit, rates under 14% on a new vehicle and 15% on a used one should be considered good in most cases. With poor credit, it is difficult to get approved period so rates under 20% are good. Anything higher than that should just be avoided.
Get A Better Car Loan APR
So, you have received your loan quote and decided that the APR is just too high. How do you improve your interest rate? It is easy, you just need to lower the risk for the auto loan lenders. There are several ways that you can do this,
Choose A Different Vehicle
The vehicle that you are borrowing can actually affect your interest rate. New vehicles, in general can come with lower interest rates. This is because they will be seen as more reliable. If it is brand new, it will have many years of reliable use. Years where the borrower will keep paying the loan payment. Used vehicles are more likely to break down, increasing the loan default rate.
In addition, certain vehicle makes will come with higher interest because of depreciation. If a lender ever has to repossess a vehicle, they want to be able to recoup as much of their money as possible. Certain makes and types of vehicles just depreciate faster and are therefore riskier to a lender.
Get A Bigger Down Payment
The more you put down, the less your interest rate will be. If you put down a sizable amount on the vehicle, you minimize negative equity. This more time that you are upside down on a loan, the riskier it is for a lender. You are far more likely to default on a loan where you have $3000 in negative equity than you are where you have positive equity.
Another way to accomplish this goal is to get a better deal. Look for vehicles with large factory rebates and negotiate harder with the dealer.
Improve Your Credit Score
By far the best way to get a lower interest rate and thus a good APR. Your credit rating is the main factor that lenders use to set your rate. The good thing is that your credit score is no mystery. It is a simple formula and you simply need to do a few things to get it in shape.
Pay Your Bills On Time
A huge factor in your score is whether you make your payments on time. A few 30 day late knocks on your report and your score can dive quite a bit. Luckily, this can be reversed if you start paying on time. In as little as just six months, you can start seeing improvements from paying your bills when they are due.
Lower Credit Card Balances
Lenders want to see that you are using your credit wisely. This means not charging your credit cards up to their max. Start paying your credit cards down until you get them under 30%. So, if you have, for example, 7000 dollars in available credit, your balance should be under 2100 dollars. Even better, get it under 10 percent and carry less than 700 dollars in debt. These are ideal numbers but even if you can not achieve this, the closer you get, the better your score will be. There are incremental improvements.
Check For Errors
It is fairly common for their to be a few minor errors on a report and sometimes, there can be some real big ones. You need to check your report often and dispute any negative information. Try to do this at least three months before you plan to use your credit because it takes time to get the errors removed. You will first have to pull your report and then write the credit bureaus to dispute the incorrect information. They then have 30 days to complete an investigation. If the creditor does not prove that the information is true, it must be removed.