When you are ready to buy a new vehicle, finding the right make and model and negotiating a good price to buy it is great, but none of that will matter if you don’t also find an auto loan with competitive rates and fair terms. All lenders are different, so before you head to the dealership, make sure you know how to secure the best auto loan rates, including starting your search with a prequalification from a reliable lender. Let’s take a look at how to make sure you get the best auto loan rates before you take a test drive.
Defining Auto Loan Rates: What They Are and How They Work
Loans allow people who don’t have large amounts of cash on hand to make large purchases that they could not otherwise afford. Like any type of loan, an auto loan requires buyers to ask lenders (generally banks and credit unions) to give them a lump sum of money to purchase a new or used vehicle from a dealership or private seller.
After making the purchase, the buyer then repays the lender through monthly installments that combine the original amount of money they borrowed, known as the principal, with an additional amount of money, known as interest, which is calculated as a percent of the principal. The buyer does this for a specific period or term of the loan. When the last payment is made, the buyer owns the vehicle and receives a clear title.
Factors Affecting Auto Loan Rates
When you are in the market for an auto loan, the rate of interest that you agree to pay has a significant effect on the total amount you will need to pay the lender each month. Therefore, it makes sense to only accept the lowest possible interest rate for an auto loan. However, finding the best rate isn’t always as simple as comparing advertised interest rates from online loan calculators. Instead, you first need to understand the other factors that affect interest rates and then do your best to maximize each factor.
Credit Score: Its Impact on Loan Interest Rates
One of the number one factors influencing auto loan interest rates is a borrower’s credit score. A credit score is a three-digit number generated by independent credit agencies that acts as a predictor of someone’s ability to repay debt based on their past credit behavior and financial decisions. In other words, it predicts how likely the person is to pay back a loan on time without missing any payments. The higher your credit score, the more likely you will qualify for the lowest possible interest rate.
Loan Term: Short-Term vs. Long-Term Loans
One of the easiest ways to reduce an auto loan interest rate is to shorten the term of the loan. The reasoning is simple: shorter loans are paid back to the lender faster, increasing the chance of on-time repayment and reducing their risk. If you have the budget to afford a higher monthly payment, opting for a shorter loan term will make the interest rate (and the ultimate price you pay for the loan) much lower.
Down Payment: How It Influences Interest Rates
A down payment can also have a big influence on interest rates because higher down payments lower the amount of money buyers need to borrow. Just like with loan terms, loans with lower principal investment carry lower interest rates, regardless of credit score.
Knowing Current Market Rates: Researching the Market Trends
When you are in the market for an auto loan, it’s important to know what the market looks like at the time. Loan interest rates do not rise and fall randomly but rather are reflections of a larger economic picture, both nationally and locally. Therefore, make sure you are paying attention to both the local auto loan interest rates that banks and credit unions advertise as well as national trends. You can do this by conducting research and paying attention to financial news reports.
Steps to Secure the Best Auto Loan Rates
Understanding the overall financial landscape is one way to make sure you get the best auto loan rate, but sometimes you simply can’t wait for the market to change to purchase a new vehicle. In these cases, start closer to home and look at your personal situation within that landscape. From improving your financial situation to fully understanding the process, it’s possible to make adjustments to secure the best auto loan rate for your situation.
Assess Your Financial Situation
The first element that any potential buyer needs to consider is their own financial status. Factors such as financial history as well as current income and savings all have a substantial effect on auto loan interest rates.
Understanding Your Credit Score: How to Check and Improve It
First, buyers need to check and understand their credit score. Remember, the higher the credit score, the lower the interest rate. These days, it’s easy to check your credit score online through one of the three credit bureaus, Equifax, TransUnion, or Experian, and everyone is entitled to one free credit report from these bureaus each year. In addition, many banks and credit cards offer their clients free credit scores and reports as well.
In general, buyers need a credit score above 600 to qualify for an auto loan and a score above 700 to qualify for the best auto loan rates. If your score is close but still below one of those numbers, it might be a good idea to take some time to work on increasing your score by making on-time payments and reducing your current debt load, especially credit card debt.
Setting a Budget: Determining What You Can Afford
Even if you have a strong credit score, remember that you still need to afford the monthly payments associated with your auto loan. To make sure you don’t get in over your head with loan payments, be sure to spend some time making a budget before you go loan shopping. In that budget, set an upper limit for your auto loan payment and be upfront with your lender about it so they can help you choose the right vehicle and down payment to keep your finances on track.
Go Through the Pre-Approval Process
One of the easiest ways to make sure you get the best auto loan rate is to go through the pre-approval process before shopping. Pre-approval takes place when you talk to lenders and secure financing before going to the dealership. During this process, you are free to shop around and talk to different lenders about the features of the loan, including the term, monthly payment, and interest rate. Once you find a combination that you qualify for and can live with, you are ready to find the best vehicle for you with financing in hand.
The value of the pre-approval process is that it takes care of payment concerns first. Once you start test-driving vehicles and find one you love, you won’t need to worry about if you can afford it or what your loan will look like. You simply need to negotiate the price to fit the range of your pre-approval. From there, you simply have your lender complete the paperwork and write the dealer a check.
Read the Fine Print
Finally, before you sign any paperwork on a new auto loan, make sure you have carefully read and understand the terms of that loan. This is a financial arrangement that will last for years, so you want to make sure that you can meet all the loan’s obligations.
Minimally, your lender should provide you with clear language that explains the true cost of borrowing the money, the interest rate, and any upfront fees associated with your loan. In addition, make sure you read through the terms and understand any penalties or processing costs you might have to pay, including prepayment penalties should you pay off the loan prior to the end of the agreed-upon term.
Getting the Best Auto Loan Rate
Regardless of your financial past, there are four simple ways to make sure you get the best auto loan rate:
- Make sure you cultivate and improve your credit score through sound financial practices.
- Save money for a larger down payment (and a smaller loan).
- Pay off your existing debts. This has the double benefit of freeing up cash each month, allowing you to make a bigger auto loan payment, as well as reducing your debt-to-income ratio, which helps you qualify for a better rate.
- Partner with a reliable lender to help you through the auto loan process.
At Hudson Valley Community Credit Union (HRCCU), we help our clients buy the vehicles of their dreams every day. Whether it is working alongside them to help them increase their credit and save money or offering them reliable auto loans at some of the best rates in the Capital District, we are a bank that is focused on our community — just as it says in our name. Contact us or stop by one of our branches today to learn more about our competitive auto loan rates and to get pre-qualified.
