Auto financing is a special type of loan that helps you buy a vehicle. Continue reading to learn more about auto financing and get tips to help you find the best auto financing rate possible.
Factors That Affect Your Auto Finance Loan
Several factors affect the interest rate and amount of your auto finance loan, including your down payment amount, the term of the loan and your credit score. If you want to make sure that you will get the best car loan rates, pay attention to the following factors.
Down Payment Amount
Offering a higher down payment can help you secure a lower interest rate on your auto loan. Usually, creditors will lower interest rates based on the size of your down payment. This is because you are lowering the loan amount and therefore reducing risk for the lender.
While you will be spending more money up front, you will end up saving in the long run. If you avoid a higher interest rate, you will pay the car off sooner, which means spending less on interest over the course of the loan repayment.
The cost of your auto finance loan will be divided up into a certain number of months. The shorter the term is, the bigger the monthly payment you will have. But a lower monthly payment could mean paying more over the course of the loan. With a longer loan, you will be paying interest for a longer period of time, increasing the overall cost for you.
You can find the right balance by budgeting and determining how much money you can afford to pay monthly. You can use a loan calculator, which are available for free online, to compare how much you will save with different loan terms.
A higher credit score will usually mean a lower interest rate. The best and easiest way of getting lower interest rates for any type of loan is to make sure that you have a high credit score. A high credit score shows that you are likely to pay off the loan, reducing the overall risk for the lender.
Tips for Getting the Best Car Loan Rates
The best thing you can do to get rates for your auto finance is to make sure that you have prepared your finances for a new loan. The following are a few tips for getting lower rates before buying a car.
Increase Your Credit Score
This is the most effective way of lowering your interest rate. There are a lot of ways to increase your credit score. A common way is to pay your debts on time each month. However, this might take longer, and it might not affect your current credit score that quickly.
The following are a few ways of increasing your credit score in a short period of time to make sure that you have a higher credit score when you apply for an auto finance loan:
- Clear Your Balance: If you have an unpaid balance from other creditors, you have to clear them so that it will no longer reflect on your credit score. Paying off this debt will keep your credit score from further lowering, and might also increase your credit score if you paid before the due date. Once you have paid, you can contact your creditors to see if they can make a positive change to your credit report.
- Avoid New Debt: Taking on new debt right before you get an auto finance loan can decrease your credit score, as credit bureaus see this as a sign that you cannot handle your finances effectively. This lowers your credit score, so make sure not to accumulate any new debt before your auto finance loan application.
- Check Your Credit Report: There might be a fraudulent activity or mistake made under your name. These might include a new loan account, unauthorized uses of your credit or debt you have paid off that still appears on your report. Before applying for a loan, make sure that your credit history is accurate.
You can get a credit report for free online to review your credit history. If you notice anything suspicious, contact your creditors to see if anything can be removed. This can potentially increase your credit score.
Pay a Higher Down Payment
The logic for this tip is simple: The higher your down payment to your creditor is, the lower the actual loan amount is.
Get a Shorter Loan Term
If your monthly budget can afford it, it is best to get a shorter loan to lock in lower interest rates. However, you have to make sure that your budget can afford a higher monthly payment. You also have to make sure to have emergency funds saved up so that you will not have a financial crisis when you need to pay for unexpected expenses in the future, such as hospital bills.
Research Companies With the Best Auto Loan Rates
You can contact different lending companies and see what auto loan rates fit your budget. Since different companies offer different prices at various loan terms, you can calculate the best car loan rates for you in the long run.
Get Pre-Approved for a Car Loan
This is one of the best tips to get a lower interest rate and also stay within the budget you have planned. When you get preapproved, a lender will let you know how big of a loan you are qualified to receive. With a pre-approved car loan, it will be easier to negotiate with car dealers over the price of the car, as you will have a set budget limit.
Even after you have been approved for auto finance, you can still lower your interest rates by auto refinancing. This is getting a new loan at a lower rate and different loan terms. Refinancing a car is one of the simplest ways to get a lower interest rate, lower monthly payment or possibly both.