When buying a car, it’s not just the sticker price that should get your attention. You also need to make sure you have a good interest rate on your loan, or you’ll end up paying quite a bit more for the vehicle than you may have anticipated.
Understanding Interest Rates
Many factors will affect the interest rate that you’ll end up paying on your car. The national average for an auto loan interest rate is 5.27% on a 60-month loan. It’s important to keep in mind that this is the average rate, though. They could be somewhat lower or much higher depending on factors such as an individual’s credit score, the age of the car that’s being financed, and the term length of the loan.
Those who have average to above-average credit scores may be able to get interest rates that are between 3% and 4.5%. Anything at or below these percentages would be considered a good interest rate. If you have problems with your credit, you may still be able to get a car loan. However, the deals you’ll find are not as favorable as those who have good credit scores.
How to Get Better Interest Rates for Cars
If you have less than stellar credit, you might want to hold off on buying a vehicle for the time being if you can. You can take the time to start improving your credit and boosting your score. This score is the most important factor when it comes to the type of interest rate you’ll be offered.
Having a good credit score shows lenders that you are responsible and that you will pay your debt on time. Your score goes up and they see you as less of a risk. This means they’ll be more likely to provide you with a favorable rate. Repairing and maintaining a good credit score doesn’t have to be difficult. Paying your bills on time and not taking on too much debt will help to boost your score over time.
Another option for potentially getting a lower interest rate, although it might seem counterintuitive, is to buy a newer vehicle. Dealers may offer better interest rates on them, and if you have good credit, you may find that you can get interest-free loans. Even though the price of the vehicle might be higher, you’ll end up saving money on interest.
Some may want to consider getting someone to co-sign a loan with them, such as a parent. Having a co-signer could help you to get a lower interest rate on your vehicle. Just make sure that you pay the loan on time, so your co-signer doesn’t have to deal with the consequences of late payments affecting their credit score.
Other Options for Saving
You can also try to negotiate to get a better price for the vehicle in some cases. Taking some money off the sticker price can help to reduce the impact of the higher interest rate, at least for a while.
Once you have the vehicle, you need to make your payments on time and work on improving your credit score, as mentioned. When your credit score goes up in a year or so, consider refinancing the car with your new score. This way, you can get a better interest rate going forward.
Those who need a vehicle and who don’t have good credit, but who have a lot of money saved for a vehicle, might want to buy a used car outright. This way, you aren’t financing the vehicle. However, most people don’t have this type of money to spare for a car.
Always Shop Around
When looking for a vehicle, no matter your credit score, always take the time to shop around and look at different vehicles from multiple dealers.
You’ll also want to shop around for potential loans. Always try to find the best interest rate possible as some banks, credit unions, and other lenders may have more favorable interest rates for you. Even just 1% lower can make a difference.
Try to get preapproved from several different lenders and choose the option that has the most favorable terms for you. Additionally, when you’ve been preapproved for a loan, it will make the negotiation process when dealing with the car salespeople much easier.