How to Get a Good Interest Rate on a Car Loan
Buying a new car? Planning to get a car loan for it? Then keep the following tips in mind to get a good interest rate – and avoid the crucial mistakes that cost you even more money over the long run.
Tip #1: Don’t Get Financing at the Dealership
The vast majority of car buyers get their car loans at the same dealership where they buy the car. Their reasoning: It’s convenient, and/or the dealers give great interest rates. Do you have the same sentiment?
Here’s the problem: As attractive as the dealer’s advertised interest rates are, they’re likely reserved only for buyers with excellent credit scores. What’s more, there’s a pretty good chance you can find an even better deal elsewhere, such as with community banks and credit unions.
Our advice: Do your homework, and get your loan lined up and ready before you visit the dealer. If the dealer offers you an even better deal, you can still have the loan canceled.
Tip #2: Check Your Credit Score
Do you know your credit score? If not – and if you let the dealer come up with your car loan for you – you’re in BIG trouble! The dealer might convince you that your credit rating is worse than it actually is, and jack up your interest rates accordingly.
Get your credit score by requesting your credit ratings from TransUnion, Equifax, and Experian. You can also check your credit score by applying for preapproved car financing. Car loans from banks and credit unions can give you a pretty good idea of the vehicles and interest rate your credit score qualifies you for.
Tip #3: Watch Out For Scams.
Another risk you run when you let your dealer set up your financing for you is getting scammed. A common scam is carried out when, a few days after you sign the dotted line and bring your new car home, the dealer calls you and tells you the car loan “didn’t work out,” and that you’ll need to re-negotiate a new loan with a higher interest rate – or give the car back, losing your deposit in the process.
Protect yourself by getting your car loan elsewhere, or by not buying the car until you’re 100% sure the dealer’s financing is finalized.
Tip #4: Don’t Focus on the Monthly Fee
Lastly, one of the biggest mistakes car buyers make is going for the loan with the lowest monthly fees. Low monthly fees normally mean higher interest rates and longer payment periods. If you’re not careful, you might end up paying over twice the car’s value throughout the life of the loan.
Remember that there are at least two things that go into the monthly fee: The price of the car and the car loan’s premium. (If you’re trading in your old car, that’s an additional factor.) A single monthly fee won’t tell you how much of each is going into it – and there’s no way of knowing whether you’re paying too much for your loan or getting too little from your trade-in.
So if the car salesman asks you how much you can afford to pay each month – you don’t need to answer. Don’t get trapped! Focus instead on the total amount you’ll be paying for the car loan over its lifetime. It’s the best way to save money and get a decent car at the same time.