Low Interest Financing Savings
How to Get a Low Interest Car Loan
You have been driving by the new car lot every day on your way home from work for years now and never given it much thought. Recently however, it seems that those shiny new vehicles are a little more enticing to you. Admit it, your old car has seen better days, maybe it's time to invest in a new one.
Before you walk on the lot, it is important that you take the time to educate yourself on how to get that low APR auto loan you really want. There are a number of factors that you should take into consideration during your search for the perfect vehicle. Some of these things will seem like common sense while others may be things you never thought about. This guide will help make your car buying experience a little less dramatic and help you to make sure you get the lowest rate possible.
How much should I put down?
Ask any dealer what question they get asked the most and, their answer will likely be “How much do I have to put down?” To most people, the logical answer seems to be “as little as possible” but, when you are trying to get a low interest loan, knowing the impact your down payment has is vital information. Many banks will ask for something down but most people really don't understand why it is so important. Here are some of the reasons your bank may request you to put some money down before they will provide you with financing, much less a lower interest rate:
- They want to make sure you are really going to come through with the loan. By making a down payment, you are telling the lender “I'm really interested in this vehicle and, I'm willing to do what it takes to show you that I'm committed.” By investing some money up front, the lender understands that you are serious about meeting your obligations and are much less likely to default. Providing money down is one of the easiest ways to show your creditor that you plan to honor the loan agreement in its entirety.
- No one likes to lose money. You wouldn't put a thousand dollars in a plastic sack and throw the sack in a river would you? Though that may seem a little far-fetched, lenders view borrowers as a risk and, they try to minimize their risks whenever possible. Like you, they have a lot of money invested in the auto loan but, unlike you, they actually stand to lose a lot more if you were to stop sending them money. Cars depreciate almost immediately and, if the amount owed on the car is more than the car itself is worth, there is no way they are going to get that money back, no matter how much they resell the vehicle for. When you put a good amount of cash towards the loan value, lenders are far more willing to work with you to lower the APR because they have less to lose.
- You are new to the game or have a blurry past. Credit is arguably the biggest factor in financing –we will discuss it in depth later on – and, if you have had negative hits in the past or are a first time buyer, creditors view you as a huge risk. Don't let your history discourage you from financing a vehicle, many times your down payment can actually rectify the situation and turn “No deal” into “Here are your keys!” Just understand that this is another area where your willingness to make a solid down payment can show the lender that you are truly committed.
Okay so now you understand why the banks want a down payment but we still have to answer the big question; how much? Traditionally, banks look for at least ten percent down however, if you can afford closer to twenty percent you are essentially covering the first year of the vehicles depreciation costs. Covering depreciation ahead of time is a smart move because it helps you from becoming upside down in your loan; owing more on the car than the actual value of the car itself. When you make an effort to take care of this issue ahead of time leaders see this as a positive move and will be more willing to give you a lower rate.
It's easy to fall for dealership promotions that allow you to put very little down in order to drive off the lot but, don't fall for these gimmicks. Unless the dealer is financing your loan, they have nothing to lose by taking little upfront and, all they care about is selling cars. Remember to keep in mind that it is in your best interest to consider your options and, decide how much you can truly afford to put down. It may seem like a smarter idea at the time to take the smaller down payment but, in the long run you may be doing yourself a favor by saving up and making a bigger initial investment.
Where should I get my loan?
As if you didn't already have enough to think about, now you have to decide who to get your loan from. Banks, credit unions, and even some dealers offer many different auto loans and, it may be hard to choose who can get you the best deal. Unfortunately, there is no straight forward answer and you will have to do a little personal research of your own but, this guide will do its best to point you in the right direction.
Credit Unions
The problem with financing through credit unions is that you normally have to be a member and, sometimes these establishments have very strict rules in place for accepting new members.
Credit unions have many similarities to banks; they cash checks, take in deposits, and provide members with ATM access, but, the key difference is that they are cooperatively owned financial establishments. Their business offers membership to their community; in return those individuals put their money into a pool which enables them provide financial services to other members. Members of such institutions have voting rights towards policies and procedures enabling them to ensure that all dealings are fair and in the best interest of all the members.
Membership does not guarantee loan approval, nor does it guarantee the lowest rate. However, because of the nature in which these facilities do business, they can afford to offer very competitive rates. They are non-profit entities; all profit that is gained from interest is simply placed back into the member pool and saved until the next person comes along with a loan request. Not only do they often offer lower rates, their contracts often come with fewer fees and penalties than those of more traditional banks.
Banks
Whether you are a credit union member or not, it's still not a bad idea to shop around and, see if other banks can beat the numbers you have already found. The main difference between banks and credit unions is; banks are trying to make a profit.
When you request an auto loan through a bank, keep in mind that they are not in the business of buying and selling cars and have no interest in the vehicle at all. All they care about during the loan approval process is to determine whether or not you are suitable enough for them to provide you with financing. This way of thinking can sometimes hurt your chances of getting a good rate because the bank is looking to make as much profit off of you as possible. Alternatively, if the bank finds you are a good fit for the loan, they may be willing to negotiate rates in order to gain your business.
A huge advantage that banks have over other financing options is that they are a much more secure means of obtaining capital. Being a federally regulated facility, banks can provide their customers with more peace of mind than most dealers. As with credit unions, banks can offer pre-qualification for auto loans allowing you to shop around and, bounce some numbers back and forth during negotiations at the car lot.
Dealers/Automakers
Dealers often offer promotional rates as a way to bring in customers. Those rates may sound hard to beat but, as we will discuss later, there are many fine print issues that can make bank or credit union financing a better fit for you.
Financing through a dealer isn't always the wrong choice however; dealers and automakers can usually overcome obstacles that other financial institutions aren't able to help with. For example, if your credit is less than perfect, the bank may have no interest in helping with your financing needs. If you have issues which prevent you from getting lower rates somewhere else, the dealer may be your best option for financing. Remember, that of all the options you have for obtaining a loan, the dealer has the most interest in selling you a car. Because of this need, dealers can sometimes match or even beat the rates that banks and credit unions provide you with. Also, working directly with the dealer cuts out the middle man and can sometimes work in your favor.
While dealers may be able to offer competitive rates, be aware that they may have add-ons that they will attempt to sell to you. These add-ons can sound very appealing and, many people fall into the trap of spending way too much for the car, turning the higher rate from the bank into a better deal. Some of the add-ons that most dealers offer are:
- Gap Insurance – If something happens to the vehicle, your insurance will only cover the market value of the car. In the event that you owe more on the car than it is worth, you are still liable for that amount however; gap insurance will cover the remainder of the cost and forgive your debt.
- Extended Warranty – Keep in mind that these are often limited and can always be purchased at a later date, should the need arise.
- Maintenance Plan – Be sure to check the factory warranty on the vehicle. Often maintenance packages are included.
The main point to keep in mind is that you should always shop around for the best rate before you make a decision. Some people find that the best rates come from credit unions or banks whereas others have better luck with the dealer. Obtaining rates from multiple sources allows you to make educated decision and get the best deal possible.
What's better? Rebates or low interest?
You spent all this time going around to different lenders, finding the lowest rate and feel good about your decision. Then a commercial comes on the television advertising the same car you are thinking about buying. “Come in today and, get $2500 off this lovely vehicle!” After all the long hours you've put in to get the best rate, now you have to stop and, ask yourself if it would be better to take the rebate instead.
The most important thing to know about low APRs and dealer promotional rebates is; you will most likely have to choose one or the other. Only a handful of people with nearly spotless credit are able to get both, if you fit into that category, by all means take them both. More than likely though, you will be forced to choose. It's not an easy choice to make but we will attempt to help you make an educated decision.
The first thing to do is research the rebates available to you for the particular model you have in mind. Many auto makers offer multiple rebates to consumers but do not always make them public. In addition to promotional rebates dealers use to draw customers in, discounts such as owner loyalty and, recent graduate incentives may be relevant to your situation. Dealers tend to down play additional rebates because if you don't take advantage of them they get to enjoy the extra profit. Make sure you know what you are entitled to before making a deal. Edmunds.com and Cars.com are good places to research as they often list all rebates for each type of vehicle on the market.
Once you know all rebates available to you it's time to figure out which incentives will benefit you the most. First, let's look at the difference between rebates and low APRs:
- Rebates save you a large sum of money up front, taking money off the entire purchase price of the vehicle and reducing your total price. These can also be used towards your down payment. Keep in mind that even with big rebates, if your APR is too high, these discounts could be rendered useless.
- Low rates spread your savings throughout the life of the loan. You don't save as much up front but your savings could add up to a rather large amount in the long run.
To figure out which option is best for you, gather all of your information together and, go to your computer. Use our rebate vs low interest calculator (or calculators from other financial sites such as: Bankrate.com, Autotrader.com and Cars.com) entering the following information:
- How much the vehicle costs before taxes
- How much you are putting down
- Trade allowance
- How much is owed on you trade
- Local vehicle sales tax
- Rebate amount
- APR
The calculator will then tell you which scenario works best for you.
How long should I finance the vehicle for?
You've decided on the right car, you've saved up enough, and you've shopped around for the best rates. Now you have another hurdle to overcome; term length.
During negotiation, your lender is going to be throwing a lot of numbers at you and you are bound to get confused. When the discussion turns to the amount of time you want to finance the car for, you need to take into consideration exactly how long you intend to keep the car and, how much are you willing to spend to get this vehicle.
There are several different term lengths available to you, the most common terms being 36, 48, and 60 month contracts. Common sense would tell you that the longer your lending term, the less you spend per month and, this method works fine assuming you don't mind paying a higher APR. The fact is, the longer your loan, the higher the rate. Often times the rate can be high enough and the term long enough, that you end up spending quite a bit more than the car is worth in the first place. The shorter your loan, the lower the rate but, since you'll be taking less time to repay a large sum, your monthly payments have to compensate. Though many may be turned off by the idea of having to spend more each month, shorter term lengths come with some pretty attractive benefits, if you just take the time to understand them. Similar to the idea that a big down payment helps build equity and reduce the chance of becoming upside down in the loan, the same can be said for shorter loan terms. By putting more towards the loan balance each month, you are paying for the vehicle faster, thus building equity in your investment before it has a chance to depreciate too much.
Another thing to keep in mind is that the longer you have to pay a loan, the more time there is for your financial situation to change. Though no one predicts bad things happening, the truth is, sometimes things pop up that can cause you to have a little less spending cash each month. The shorter your loan is, the less chance you have of something like this taking place. Lenders take this into consideration as well and, by showing them that you are willing to take a shorter contract, you are proving to them that you are a worthy borrower and someone that they can depend on to follow through with their obligations. Your current lender, as well as future prospects, will see this commitment and be more willing to work with you the next time you need a loan.
Simply put, the quicker you own the car in full, the less you will end up spending on it. That being said, you shouldn't set your mind on the shortest term available. Yes, the rates may be lower but you have to come into negotiation knowing how much you can afford each month and, adjust your term rate to meet your needs. Bottom line; if the monthly cost isn't too high, take the shortest term length available. If the payments are a little too much for you to afford, consider taking a longer contract with a slightly higher rate, or maybe even consider a different vehicle, just don't fall into the trap of taking the longest term possible, you will end up spending way more than the car is worth in the long run.
All about credit
Earlier, we mentioned that credit is the biggest determining factor for lenders when they negotiate your APR. In order to understand how important your profile is to the process, let's discuss what your credit report is and how far in advance you should review your report prior to the purchase of a vehicle.
First things first, it is important to understand how you can obtain copies of your report. Most lenders use at least one of the three agencies; Equifax, Transunion, and Experian determine your credibility. Your report is simply an electronic document detailing your financial history. Certain lenders such as banks and, credit card agencies report your information, both positive and negative, to the reporting agencies which in turn create a document to be provided to future lending prospects. Certain discrepancies can be detrimental to your chances of getting a low APR on your auto loan; therefore, you should review your report first. Information that can be reported is:
- Personal information – Social Security Number, date of birth, address
- All accounts, open or closed – date open/closed, line of credit awarded, payment information
- Public records – liens, bankruptcies , foreclosures, repossessions
- Inquires
- Your score
Should something on your report appear inaccurate, it is highly important that you reach out to the reporting bureau and, dispute the mistakes.
Each of the three bureaus are required to provide you with a copy of your report once a year for no charge, any additional inquires may incur fees. You should note that you are not required to obtain records from all three bureaus at the same time however, since different reports may have different information, it would be wise to do so and, thoroughly review each document. To get started, go to www.annualcreditreport.com and, fill out the credit report request form.
Now that you have a copy of your report and know your score, you have the advantage of knowing what blemishes need to be taken care of prior to applying for your auto loan. It is important to review this as far in advance as possible so that you can correct any mistakes and, make an effort to resolve any negative issues. Usually doing so for a minimum of six months, more if possible, will show creditors that you recognize your financial situation in the past has led to negative occurrences but you are financially secure now and are doing what it take to restore your good financial standing.
Finally, you should be aware that certain things remain on your credit report for different amounts of time. All positive reporting is permanent and will always help maintain your good standing. Most negative marks remain for about seven years so, if there is something on your report that could be influencing your score; you are better off fixing it now than waiting for it to vanish.
Is my FICO score good or bad?
So we've discussed credit and how you can check your report but, how does this help if you don't know what your FICO score means? Even if you know what your score is, do you know if it's considered good, fair, or bad? When considering an auto loan, lenders will usually place you in a credit bracket based off your total score. National statistics show these brackets to be:
- 720-850 - Excellent
- 690-719 – Very Good
- 660-689 – Good
- 620-659 – Bad
- 500-589 – Poor
FICO scores can be less than 500 however, lenders view those scores as almost impossible to invest in and will likely deny you financing. If you have a lower score you may still be able to find financing at certain “second chance” lenders but the rates will be very high and, you will be better off attempting to correct your score before making a vehicle purchase. Obviously, the higher your score is, the easier it will be for you to get a better APR. The difference between having a score of 720 and one of 500 can make a huge difference in your financing interest. The national average of rates provided on a 36 month new automobile loan range from 3.384%, for excellent credit, to 17.036%, for poor credit. There is almost a 14% difference between these two. Just to give you a better understanding of how important your score can be, let's use this information in an example.
First let's assume you have an excellent score and are purchasing a vehicle for $25,000. Assuming you put nothing down, which we already know is not a good idea; your monthly payments come out to $731.277. Using this same information for someone with poor credit we get monthly cost of $891.77. Essentially, the person with the lower score ends up spending $5778 more than the person with an excellent score.
Another plus to having a higher score is that you have more levity with the lender. You may be able to negotiate an even lower rate than the national average. To give you an idea of what rates are acceptable within your FICO score bracket, we have provided the national average for the three most common new car terms.
36 month
- 720-850 - 3.384%
- 690-719 - 4.807%
- 660-689 - 6.853%
- 620-659 - 1.435%
- 590-619 - 15.66%
- 500-589 - 17.36%
48 month
- 720-850 – 3.412%
- 690-719 – 4.825%
- 660-689 – 6.877%
- 620-659 – 10.458%
- 590-619 – 15.69%
- 500-589 – 17.062%
60 month
- 720-850 – 3.453%
- 690-719 – 4.857%
- 660-689 – 6.923%
- 620-659 – 10.536%
- 590-619 – 15.801%
- 500-589 – 17.21%
Using this information you can see that having good credit make a huge difference in the financing process.
It's all in the fine print
The negotiations are finally coming to a close and, you think you've made a great deal you can be proud of. Now the lender places in front of you a small mountain of paperwork. It's easy to just sign your life away without really paying attention to or understanding what all the fine print means but, the result of agreeing to the wrong terms can prove disastrous to your wallet. To keep from making a dangerous mistake, it's important to take the time to read and, understand all that fine print. If you don't understand something about your contract, don't be afraid to ask.
Some of the information in the fine print may cover things you have already discussed with the lender: purchase price, interest rate, and any discounts that will be applied to your loan. Other things won't be as clear and may be information you never even thought to ask. Some of the most common information found in the fine print is:
- Whether or not the rate is variable. Rates can be either fixed or variable; meaning a fixed rate will never change but a variable one will, usually increasing after a certain amount of time.
- Payment schedule. Pay close attention to this because it breaks down how much of your payment is applied to the principal of your loan.
- Late charges
- Grace period
- Penalties. Often lenders charge a penalty if you decide to pay the loan off early. Doing so still saves you money in the long run and, lenders know this. Since they lose a fair amount in interest, some lenders will charge a penalty in an effort to gain back a portion of that loss.
- Bounces. What happens if your check bounces
- Defaults. What occurs in the event that you default
Try not to get too wrapped up in getting the lowest rates. Many dealers offer 0% financing which sounds like a great deal. The truth is; if you read the fine print, you may discover that there are a number of penalties and fees added to you your loan; they have to make money some way or another. The best thing you can do for yourself is to pay attention to each single document you sign, feel free to take your time and, make sure you fully understand what you are agreeing to. Above everything else, make sure you don't sign something if you don't understand what it means.
Does it really help to make extra payments?
You've finally done it. It was a long road but you signed the mountain of paperwork and drove off the lot in your new car. You've done everything within your power to make sure you saved as much money as possible, now you just have to keep up with your payments and, wait until the car is paid off. Well, that's not exactly true; even after you've completed the purchase of your vehicle, you can continue to save money by making extra payments.
Different people pay off their loans early in different ways. Some send in a little extra here and there when they have it, others make bi-weekly payments, and, others consistently add the same amount to the monthly payments. Though there are different ways to accomplish paying your car off quickly, everyone will agree, it's the smartest decision you can make. Making extra payments reduces the total interest that you have paid towards the loan, and shortens the loan itself as well. There are a couple ways to make extra payments without hurting your budget.
- Bi-weekly payments. Making just half a payment every two weeks actually results in an extra payment ever year. Since there are 52 weeks in a year, making half payments would equal 26 payments in all. Do the math on that and, you find that you've actually made 13 full payments in 12 months.
- Add $50. You wouldn't think so but just adding an extra $50 per month can add up pretty quick. Over the course of a year that equals $600 per year which, depending on the value of your loan could be an entire payment. If you can afford to add more than $50 per month, the extra money just adds up quicker.
The truth is; there is more value to making extra payments than you could ever imagine. As the points above show, just by making one extra payment a year, you are essentially paying for your interest and reducing the principal on your car, that idea alone should be enough to convince you that extra payments are worth making if you can afford to do so. Not only does paying your loan off early help you to save money on interest, it actually looks better on your credit and help you out with future endeavors.
It may seem like a lot of work but remember, it's your money and, you want to invest it wisely. Getting a low interest auto loan may take some extra effort but, if you take the time to do it right you are bound to be satisfied with the results. Remembering the points discussed in this guide will help you to obtain the best APR possible and have you driving off the show room floor with more money in your pocket.
