You’re ready to buy a car and, like most people, you’re wondering how to get the lowest auto loan rate. The rate you get will affect your monthly payment and potentially other financial decisions you make in the future.
At Addition Financial, we work hard to provide the best possible interest rates to our members. While we’re in charge of the underwriting process, our members can do some things to qualify for the lowest rates we offer.
With that in mind, here are some pointers to help you qualify for a low auto loan rate before you buy your next car.
Review Your Credit Report and Repair Your It If Necessary
The first thing to do before you apply for an auto loan is to review your credit report. You can order one free credit report a year from each of the three main credit bureaus: Equifax, Transunion and Experian. If you prefer, you may choose to sign up for a credit monitoring service instead.
Once you get your report, review it thoroughly. If there is anything on it that you don’t understand or believe to be inaccurate, you have the right to contact the credit bureau(s) and rectify the problem. You should be prepared to provide supporting documentation as requested.
The same is true of credit card fraud. If you spot any suspicious activity, you should report it immediately and follow up to make sure it is removed from your credit report. That way, when you apply for an auto loan, you’ll be sure your report is accurate.
Pay Down Your Debts
Are you carrying a significant amount of credit card debt? If so, you may want to consider paying it down before you apply for an auto loan.
Most lenders will look at your debt-to-income ratio when they make a lending decision. For mortgages, you should aim to have a ratio of less than 43%. The requirements for auto loans aren’t as stringent, but you’ll still be likely to qualify for a better rate if you don’t have a lot of existing debt.
If you do want to pay down your debt, it’s a good idea to start with the card that has the highest interest rate and work from there. That will save you the most money in the long run.
Consider All Lending Options
Before you lock yourself into a loan, it’s smart to take some time to shop around and understand your options. People who rush into buying a car sometimes settle for a dealership loan because it’s easy and convenient.
What you need to know about dealership loans, though, is that they often include hidden fees that can add up to significant additional costs over the life of your loan. Dealers sometimes get a finder’s fee and they also tend to push long loan terms.
Instead, talk to your credit union or bank. Then, shop around a little bit and consider your other options. Credit union car loans often have lower interest rates than bank loans. You may have to pay a small membership fee to join, but you’ll more than likely make up for it in interest savings and other perks.
Choose the Shortest Loan Term You Can Afford
A lot of people focus on interest rates when they take out a loan without considering the big picture. Interest rates are important, but they’re not the only consideration when it comes to determining which auto loan is the best.
For example, if you take out $15,000 loan for five years at a 6.5% APR, your monthly payments will be about $293 and you’ll pay $2,610 in interest over the life of the loan.
By contrast, if you shortened the term to three years, your monthly payment would increase to $460 but you would pay only $1,550 in interest – about 40% less than what you would pay with a longer loan term. Since the principal is the same, it’s worth considering your long-term costs. If you can afford the higher monthly payment, you’ll save money.
It’s also worth noting that long-term loans will limit your equity in your car. It will take a significant time before you have more equity than you owe. With a shorter loan, you’ll build equity more quickly.
Make the Biggest Down Payment You Can Afford
Finally, you should do whatever you can to reduce the size of the loan you need. You might have the cash to make a significant down payment or have a vehicle with a great trade-in value. In either case, reducing the amount of your loan will also save you money in the long run.
By doing a bit of research and taking the time to shop around, you can be sure that you get the lowest possible auto loan rate you can qualify for.
To learn more about Addition Financial’s competitive auto loans, please click here.
Posted on Aug 12, 2018
