Since you decided to purchase a new (or new to you) car, you’ve probably spent a lot of time considering the base price plus what you’ll pay for customizations, insurance, titles, and tags. What you may not have thought about as much is the interest rate on any loan you obtain. An interest rate that is too high could mean you spend thousands of dollars more than you expect to over the course of paying off the loan. There are ways to ensure you get the best rate possible, though.
Consider the Type of Lender
Shop the different types of lenders and dealerships before deciding on a loan. Some people borrow from a bank or credit union, but many get their loans through the dealership. The dealers take a cut in the process but that doesn’t mean it’s the most expensive option. In fact, if you have excellent credit, dealerships often have better interest rates since they can provide zero percent financing or other special deals. Still, to ensure you borrow from the best lender for you, you should contact the lenders yourself to make sure the bank can’t give you a better rate than the dealership offered.
Know What You’re Working With
Your personal credit and financial history largely play into the interest rates you’re offered. Before you begin searching for a lender, check your own credit report. Each of the three major reporting agencies (Experian, TransUnion, and Equifax) provides one free report per year. Keep in mind that these reports will be similar but not identical, so if you don’t want any surprises, you should check all three. If you notice any errors, you’ll need to take care of them before buying a car. It also helps to check your credit score, which will further help you determine how much you might end up paying in interest.
Focus on the Total Amount Over the Monthly Payment
Never talk about your monthly payment budget when negotiating with lenders or car dealerships. When you do this, they can take the number you provide and offer to lower your monthly payment. What they don’t readily point out is that lowering your payment means you have more payments to make, and they make more money interest. Only speak to lenders in total amounts and remember that paying your car off faster means you spend less on interest.
Decide Between New and Used
Your first thought may be to purchase a used car to save money, but used cars often have higher interest rates and may end up costing you the same amount in the long run. Most of the time, only new cars are approved for zero percent financing, although you might get lucky and find a certified pre-owned with the same offer. Just keep in mind that the newer a car is, the less you are likely to pay in interest.
Read the Entire Contract
Don’t speed read the loan contract and sign it on the spot. Instead, take it home with you so that you can read through it without feeling rushed and ensure you understand all the terms. Lenders who act like this is a problem may have something to hide, making it even more important to read everything. Avoid contracts that have mandatory binding arbitration, which means you cannot go to court if something goes wrong, as well as those that have penalties for paying off the loan early or do not include all the oral promises the lender provided you. If the contract mentions a variable interest rate, calculate the highest possible payment to ensure you can afford it before signing on the dotted line.
Do Your Research
Never just assume a lender has a good reputation when searching for low interest rate auto financing. Ensure the lender has the proper licenses by investigating its reputation with the Better Business Bureau, the office of consumer affairs, or other state or federal government agencies. You can also check online review websites to see how previous borrowers felt about the service.
Purchasing a new or used car can be a lot of fun, but only if you are patient and shop around for the best rates. After all, driving your new car won’t be as much fun if you realize the payments are going to be hard to make or that the interest is going to cost nearly as much as the vehicle itself.