There’s nothing quite like the smell of a brand new car, and that feeling when you drive it off the lot. Amazing!
However, to get to that point, you’ll probably have to find a good deal, and then qualify for a loan. Both of these tasks can seem rather daunting. However, by following the 5 tips laid out below, the process will become clearer and simpler.
1. Raise Your Credit Score As High As Possible
In order to enjoy the very best interest rates possible on your auto loan, you’ll need a strong credit score. How strong? Typically, the best loan terms are offered to those with a score of 720 or higher – if your score is in that range, you might be eligible for loan rates as low as 0% (i.e. free money), or at least, not more than 3%.
How do you go about building such a high score? First off, if you have any negative items on your credit report, which might not meet legal requirements, you should strive to remove them by use of the Fair Credit Reporting Act (we’ve reviewed elsewhere how that works).
If you have balances on your credit cards, which are above 30% of your card limit, you’ll want to reduce those amounts, to boost your score. If you simply don’t have much credit, you should consider building credit. Secured credit cards are a great place to start.
While building new credit (and cleaning up bad credit) is really important, You’ll probably want to avoid opening new accounts, or applying for any new credit, in the 6 months before you apply for an auto loan. Doing so could reduce your credit score, which will lead to paying a higher interest rate.
2. Obtain A Loan Preapproval Before You Start Shopping
Once you’ve decided to purchase a new car, it is tempting to head to the dealership immediately, and start looking. When you show up at the dealership, you’ll probably be told “We offer excellent financing”, and encouraged to apply for a loan.
Here’s the thing: Car dealerships rarely offer the best loan terms. Auto loans are a major source of profit for many car dealerships, with extra fees and points frequently tacked onto the loan. This is especially true if you’re buying a used car – but it applies to new vehicles as well.
As a result, you’ll sometimes overpaying for a loan through the dealership, even if you have good credit. So, showing up at the dealership with a loan offer already in hand, makes things much easier. The question now becomes: Where should you apply for a loan?
3. Apply For A Loan Through A Credit Union
One of the best places to shop for an auto loan, is at a credit union or a smaller bank? Why? Credit unions typically offer lower interest rates on auto loans, and provide a more user-friendly, personalized service process. It’s nice to know that the person who decides your loan is someone whom you can drop in and have a chat with.
It is true that credit unions have membership restrictions; for example, you might have to work for a particular employer, be a former member of the military, or live in a certain area. However, membership rules have become less restrictive, and, given the number of credit unions out there, there’s probably one that you can join. Here is a comprehensive list of credit unions, as well as a compilation of those which are more open in terms of membership.
4. Refinance Your Auto Loan (If You Don’t Get The Best Terms)
Sometimes, whether because of your less than perfect credit score, or interest rates being high at the time, you’ll be unable to obtain the best possible terms on an auto loan. If this happens, don’t worry. You can sign up for an auto loan at existing rates, and attempt to refinance the loan in the future, say, a year from now. By doing so, you’ll be able to reduce your interest rate, and save money.
Of course, when you decide to refinance, you are likely extending how long you’ll have an auto loan for, so, make sure that the overall costs make sense. Simply being offered a lower interest rate and a reduced monthly payment isn’t good enough, if the term of the loan is much longer. Use Bankrate’s loan calculator to help you figure this out.
Where should you shop for an auto refinance loan? One of our favorite options is rateGenius, a nationwide auto loan refinance broker. You can also, as we’ve mentioned, check with your local credit union, to see if their auto refinancing options make sense. Credit Karma and Lending Tree can also be great places to shop for an auto loan refinance.
5. Negotiate
This can’t be emphasized enough. When shopping for an auto loan, don’t go with the first option you are offered. If you apply through a credit union, find another credit union you can apply with, or perhaps, choose a local bank. Let these lenders know that you are shopping around for the best offer.
As a result, they will often work harder at offering you the best rate possible. All loan applications within a 30 day period count as a single application, for FICO scoring purposes, so you don’t have to worry about lowering your credit score by applying.
The Final Word
By following these strategies, you’ll enjoy your new car even a little bit more, knowing that you saved money – and didn’t get ripped off. Drive safely, and enjoy the ride.
