One of the most difficult parts of buying a new or used car isn’t picking the right car, but rather getting the best financing for it. There are so many variables that go into determining your auto loans that it shouldn’t be surprising that many people find the process incredibly intimidating. As result, they accept the first loan offer they receive rather than spending the time and effort necessary to find the best one. Fortunately, there are a variety of simple things you can do to find the best auto loans for your next car purchase.
Start With Variables Which Affect the Interest Rate
If there is one thing that will dramatically affect the quality of your auto loan, it is the interest rate. As a result, focusing on variables which affect the interest rate is always the best place to start.
The Lender
The first variable that affects the interest rate is the lender. Unless you are borrowing money from a private part, you are going to be working some type of lending institution. For most people this means a bank, credit union, or dealership financing branch. Each of these options offers a unique set of benefits and drawbacks to consider. In most cases, you should avoid getting a loan directly from a dealer. While they do get access lower “wholesale” interest rates, they also take a percentage of the interest rate. Always see what they can offer but don’t blindly accept it. You also shouldn’t disregard online lenders. There have been a number of newer online auto loan lenders that consistently offer competitive interest rates. Another thing to keep in mind is smaller credit unions and online lenders can be extremely competitive with larger institutions because they were not as likely to be caught up in the credit crush that took place a few years ago.
The Car
While you should have your loan in place before buying a car, knowing what “type” of car you will buy will directly impact the interest rate. New car loans almost always provide better rates than used cars. The older the car is, the higher the interest rate will be. This is because older cars carry a higher risk for lending institutions.
The Loan-Term Length
Most new car loans can be extended for up to 60 months which means you may end up with a loan total that far exceed the value of the car. While longer loans can definitely make your car more affordable on a monthly basis, it creates a poor long-term investment.
Your Credit Rating
Of course your credit rating will play a large role in your total loan balance as well. Better credit means lower interest rates because you are considered to be less of risk for the lending institutions. Currently, it is estimated that only 15% of Americans have good enough credit to qualify for zero percent interest.
Additional Tips to Get the Best Auto Loans
Unfortunately it is difficult to control the 4 variables that primarily affect your interest rate, especially over a small period of time. This makes it critical to focus on the variables you can control.
Limit Your Loan Shopping Window to 2 Weeks or Less
The first thing you need to do is set up a small window of time to do all of your loan shopping. Every time you apply for a loan your credit score will go down. This is particularly important if you are on the cusp of different rating tiers. If you make all of your applications within a two week period, credit bureaus will typically count them all as single query rather than multiple queries, thus having a minimal effect on your credit score.
Shop for Loans Separate from the Car Whenever Possible
Another variable you can control is how you shop for your auto loan. As long as you are not going through a dealership for financing, always get the loan amount approved before looking at specific vehicles or negotiating the final purchase price. By getting pre-approved for a loan amount you gain the flexibility of showing up to a dealership with what amounts to a blank check. This gives you maximum negation power which can dramatically reduce your final purchase price.
Don’t Assume Your Lender is Offering the Best Available Loan
Believe it or not, lenders are not obligated to offer you the best rate that you qualify for. Some studies note that dealerships will mark up your interest rate by nearly 2%. One of the simplest ways to get the best interest rates available is to let lenders know that you are shopping around. This gives them additional incentive to compete for your business and offer the best available rates at the outset.
Avoid Conditional Financing at All Costs
Dealerships in particular are notorious for offering conditional financing. Never accept a car from a dealership until the financing has been agreed upon. This includes the down payment amount, interest rate, length of loan, and monthly payments. Anytime financing is contingent or conditional, there is a good chance the dealership will be able to change the interest rates later on which will significantly affect how good the auto loan is really is.
How to Tell If a Loan is actually a Good Deal
Depending on your situation there are a lot of different ways you may look at your auto loan and decide whether or not it is actually the best option. In the end, there is only one way to make sure you are getting the best auto loan.
Look at the Loan’s Total Cost Not the Monthly Payment
When it comes to finding the best auto loan, the most important factor to focus on is the total cost. Of course the monthly payments need to be reasonable and an amount that you can afford but this shouldn’t dictate how “good” you think the loan is. When comparing the best auto loans, the APR or Annual Percentage Rate is what will determine how good the loan really is. A lower rate provides significant long-term savings. This is especially true the longer the term of your loan is.
