These days, car purchases are causing sticker shock: new car prices are up 5% year-over-year, and used car prices up to 27%, according to Edmunds.
But the price of a car is not the only thing that affects its availability: if you plan to take out a loan, the interest rate and the terms of your car loan matter. Not everyone thinks about a profitable car loan deal or even realizes that maybe negotiate.
Since the average selling price of a new car is now in excess of $ 40,000 and the average car loan term is stretching, now 70.6 monthsChanging the interest rate on the loan by one percentage point is expected to save you about $ 1,200 over the life of the loan.
Here are three steps to help you get the best car loan deal.
Check your credit reports and remove any errors
Americans can get a free copy of their credit reports from these credit bureaus once a year with AnnualCreditReport.com, a website created by the federal government.
Eliminating any errors that appear on your credit report can help reduce the likelihood that you will have to overpay on your car loan. Some common mistakes are duplicate information (such as a collection invoice or loan application that appears multiple times by mistake), medical billing errors, and confusion in credit reports where information about someone with a similar name is mistakenly added to your credit report. …
You can get free copies of your credit report at AnnualCreditReport.com will display information about your financial history that creditors will consider, such as the amount of your debts, the history of your payments, and any bills of exchange in collection. However, these credit reports not show your FICO credit rating: some banks, including American Express
Know the typical interest rates for your credit rating
If you know the typical interest rate or annual interest rate that other people with your credit rating usually get from auto lenders, you are less likely to get theft.
From 2015 to 2017, interest rates on cars were very low – the average rate on 60-month car loans was about 4%, and some clients with good credit ratings received zero interest loans… Average interest rates have risen slightly since then, with the average rate on a 60-month car loan at 5.05% in May 2021, according to data data from the Federal Reserve.
For used cars, which typically have higher interest rates than new cars, consumers with a FICO rating above 781 should look for interest rates below 4%. Consumers with a credit rating of 661 to 780 should look for an interest rate below 6%. And consumers with a credit rating of 601 to 660 should look for an interest rate below 11%.
Consumers with a credit rating below 601 tend to pay interest rates that are 17% or more for used cars, astronomically high interest rates that make it difficult to buy cars and increase the likelihood that the car will eventually be returned to ownership. If you are in this boat and can do without a car, it might be a smart move to try improve your credit rating before the purchase. Focusing on paying off any credit card debt, making all loan payments on time, and waiting for negative information on your credit report to age your credit report can ultimately save you thousands of dollars on your car.
A common misconception about getting a car loan from a car dealership, sometimes called a “dependent” car loan, is that there is no room for negotiation. In fact, when a car dealership finance manager enters your information, he usually sends it to several auto lenders, including banks, credit unions, and specialized auto lenders. It may sound unethical, but the car dealer does not have to tell you about all the loans that were offered to you, or even give you the best loan that was available!
Many car lenders allow finance managers at a car dealership gain extra points at the interest rate. This “participation rate” can be up to 2.5 additional percentage points, which is left to the dealership and fills the dealership’s pockets, rather than being sent to the auto lender. If the dealer does not consider you an experienced buyer, he can only show you a premium loan, not a cheaper loan offered by another lender.
In 2020, Outside Financial calculated that average car loan there was a markup of $ 886.
Come to the dealership with your financing
You don’t need to take a car loan from a car dealership. Many banks, credit unions and car lenders allow you to issue a “direct” car loan, generally bypassing the financial office of the car dealership.
As of July 27 PenFed Credit Union offered interest rates on car loans from 0.99%, and Federal Credit Union Alliant offered an interest rate on a car loan of 2.24%. Credit unions often offer affordable loans because they are non-profit organizations.
You may not find a better deal with a direct car loan than at a car dealership, but it gives you a negotiating tool. But do not report that you have found your own funding until after you have reached an agreement on the purchase price of the car – if the dealer knows he cannot keep you on the loan, he is less likely to bargain with you for the price of the car itself.
You will still want to hear what annual interest rate the dealer’s lender partners will offer you, but coming up with your own funding gives you a second option.