When shopping for a new car, chances are you’ll be applying for an automotive loan. Although this can be an expensive prospect, it doesn’t have to be. Here are XX for getting the best interest rate on your auto loan for a new or used vehicle.
1. Separate Loan Shopping from Car Shopping
While dealerships make it convenient to get financing at the same time that you make your auto purchase, these loans are not necessarily the best choice. Instead, shop around and get prequalified for a specific amount before heading out to test drive. Credit unions, online banks, and brick and mortar financial institutions all tend to have better loan rates than most car dealers.
2. Improve Your Credit
Increasing your credit score before shopping for a loan will help you qualify for the best rates. Each year, you can get a free credit report from the three major bureaus, Experian, Equifax and TransUnion, by visiting the official government site at annualcreditreport.com. Check these for any errors, which can be disputed and removed if they are proven incorrect. If your score is lacking, take steps to improve your credit by paying your bills on time and paying down consumer debt.
3. Consider the Long Term Cost of the Loan
While a low interest rate is great, you won’t save as much money if you extend your loan period over several years. Although five to seven year car loans are becoming more common, experts recommend keeping the loan period to three years so you don’t end up paying more in interest over the life of the loan (or owing more than your car is worth). According to Bankrate, you should look at the total cost of the loan rather than the monthly payment when considering finance options.
4. Plan to Put Money Down
While many dealerships offer car loans with no money down, these aren’t always the best financial decision. Because cars depreciate so rapidly, financing the entire cost means you will almost certainly end up upside down on your loan. If for some reason you need to sell your car, you may not be able to do so. For best results, try to save up about 20 percent of the total cost of the car.
5. Read the Fine Print
Be aware of red flags in your loan paperwork that could cost you money. Examples include a variable interest rate; prepayment penalties, in which you are fined for paying off the loan early; and mandatory binding arbitration, which removes your right to sue if something goes wrong.