How to Get the Best Rate on Your Car Loan

Unless you have enough money saved up to pay for a new or used car outright, shopping for a car usually entails shopping for auto financing too. For most individuals, cars are a significant purchase, and taking out a car loan is a way for them to enjoy their purchase right away while paying it off over time.

Much like the cars you are shopping for, there are a variety of auto loan options available to you, with some offering better rates and terms than others. To ensure you get the most affordable auto financing for your vehicle, here’s how to get the best rate on your car loan.

Check Your Credit Reports

Before you start to search for a car loan, it’s crucial that you have a clear picture of your credit history, as this will impact what credit you are eligible for. Your credit report details your financial history, essentially what credit you have had in the past and how you dealt with it. Your report lets lenders know how much debt you have and whether you tend to meet your payments on time.

All the information in your credit report is summarized into a credit score, a number that loan providers and financial institutions use to decide whether they will give you a loan, and if so, what the loan terms will be.

Finding out what your credit score is will give you a better idea of what kind of loans you may be offered, but you should also take the time to thoroughly check all your credit reports because they may contain mistakes that can impact your chances of securing credit. The earlier you check your reports before applying for a loan or credit card, the better; give yourself time to sort out any misunderstandings.

Improve Credit Score

A high credit score is one of the best ways to secure a low interest rate on your car loan. The higher your score, the lower your interest rate will be. If you already have a high credit score, your lender is likely to offer you a low interest rate. If yours needs work, however, there are some steps you can take to increase your credit score to snag a better rate on your auto loan.

If your score falls below 760 or what your credit bureau considers “excellent,” then you have some room to improve your score. Some of the most common ways to boost your credit score include paying down debt, correcting errors on your credit report, and making smart decisions when it comes to your personal finances.

Pay Down Debt

An important component of your credit score is your debt-to-income ratio. This compares the amount you owe each month to how much you earn. By paying down more of your debts, whether it’s credit card or student loan debt, you can improve this ratio and boost your credit score relatively quickly.

Correct Credit Report Errors

Sometimes credit reports contain errors that can reduce your credit score. If your report shows any signs of errors, such as accounts that don’t belong to you or are no longer open, resolve these as soon as possible to give your credit a boost.

Make Smart Choices

While you’re in the process of securing a new auto loan, you want to make sure you’re making smart financial decisions. In addition to paying down whatever debts you can, you should avoid making big charges to your credit cards that could impact your credit utilization ratio and cause your credit score to decrease. It’s also imperative that you make on-time payments on any other loans or credit cards so these don’t appear on your credit report. Lastly, you should avoid applying for new credit so that you don’t rack up hard inquiries on your credit report and further reduce your credit score.

Shop Around For the Best Rate

You should put the same effort into finding the best auto financing as landing the cheapest deal on your new car. Unfortunately, most people don’t shop around for the best rate, instead they wait until they are at the dealer purchasing their new motor and get stuck with less than desirable interest rates. All this can be avoided by doing your homework ahead of time.

There are various types of financial institutions that offer auto financing including credit unions, banks, online lenders, and car dealerships. Each has advantages and disadvantages so you should weigh up your options and consider what works for your individual situation. A good place to begin your search is in one of the institutions where you already have an account or loan as they may offer discounts or better rates for existing customers.

Credit Unions

Credit unions are not-for-profit, member-owned financial cooperatives, they funnel their earnings into providing better interest rates and lower fees for their members. Although some credit unions are as large as conventional banks, many are small, local organizations that offer a personal service.

When you opt to take out a car loan from a credit union like T&I Credit Union, you are likely to secure low interest rates, smaller minimum loan requirements, and may have better chances at being approved than if you went elsewhere.

Large Banks

Because of the scale and resources of larger banks, they tend to offer easy loan application processes that can be completed quickly online. However, loan applications are usually approved or declined by an automated service, and there is little chance to discuss your options.

Online Lenders

Similarly to large banks, online lenders offer a simplified loan application process that can be done from the comfort of your home online. Some online lenders actually collaborate with multiple financial institutions and can show you multiple loan offers when you submit just one application, which is an incredibly efficient way for you to evaluate your borrowing options. The price you pay for this efficiency, however, is personal service.

Car Dealerships

Most car dealerships offer loans that you can sign up for when you purchase your vehicle. These are generally loans provided by a separate financial institution, such as a bank or credit union. However, the rates offered to customers at the dealership are usually favorable because the dealer adds their own markup.

There are also car dealerships that advertise “Buy Here, Pay Here” schemes, where the loan doesn’t go through a third party institution. Avoid these offers because they come with inflated interest rates and poor lending policies.

Get Pre-Approved

After you’ve shopped around for the best rate, a smart next step is to get pre-approved for an auto loan. It’s easy to get pre-approved with credit unions and other lenders, and doing so can help you lock in the lowest interest rate and give you greater bargaining power at the dealership. Plus, you’ll have a better sense of how much you can actually afford, which can help you refine your budget and car search.

At T&I Credit Union, you can get approved for a car loan in 20 minutes or less by applying online. Simply provide your proof of employment, income, and assets, driver’s license, and Social Security number.

Opt For the Shortest Possible Loan

When buying a car and searching for a loan, most consumers concentrate on how much the monthly payment is. Whether you have a poor credit rating or an excellent credit rating, the loans with the lowest monthly payments will be spread out over the longest period of time.

Long loan repayments, particularly those over 60 months, should be avoided as much as possible because they cost you more money in the long run. There are several reasons for this. Firstly, long loans tend to come with higher interest rates because, the longer it takes someone to pay back a loan, the higher the risk for the lender that they may not be paid back in full.

Even if you manage to find a long loan with a reasonable interest rate, you will still end up paying more because you will be paying that interest for longer. On top of that, while you are paying off your loan, the value of your car will be steadily dropping, meaning you will have paid more than the car is worth.

Choose the Right Car

Although the borrower’s profile is usually the most significant factor in a lender’s decision to offer a loan, the car can also impact the conditions they propose. One way to boost your profile when buying a used car is to opt for a certified pre-owned vehicle (CPO).

CPOs are typically viewed by lenders in the same light as new cars, so they offer better financing. Although CPOs cost more than an average used car, meaning you may have to take out a bigger loan, the improvement in the conditions of the loan can make up for that fact.

You should also consider the loan-to-value ratio (LTV) of the car you plan to buy. The LTV is the value of the car compared with the loan amount; a high LTV translates to a high interest rate. To keep your interest rates low aim for an LTV of less than 80%.

Best Rate on Your Car Loan

Get Pre-approved For an Auto Loan Today

When you take out an auto loan through T&I Credit Union, you can finance your new car purchase and secure the best possible interest rate. To find the best rate for you, call (248) 397-9456 to get pre-approved today.

About Tammy Newcomb

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