Buying a car is expensive, which is why most car buyers opt to take an auto loan to finance the purchase. In fact, statistics show that 81% of new vehicles bought in the U.S. in the first quarter of 2021 were financed. But whether you’re getting an auto loan or not, you need to get the best deal. You need to shop around to identify a lender with the best terms. If you are buying a car with a loan, here are some tips to help you get the best rates.
1. Improve Your Credit Score
Before applying for an auto loan, you need to improve your credit score. Your credit score is a critical determinant of your auto loan rate—the better your credit score, the lower the interest rate you’ll pay. According to Experian, the average credit score in the U.S. was 711 in 2020. The minimum credit score will depend on the lender, however, a good score is from mid 600 to over 700. You can visit credit bureaus or your bank to check your score. If the score is too low, take time to improve it before applying for an auto loan.
2. Do Your Research
A useful rule of thumb is not to take the first auto loan you’re offered. Take time to research before deciding on the auto loan to get. Fortunately, most auto retailers provide all the information and car loan calculators on their websites to help you decide. Before settling on a lender, check the interest rate, the repayment terms, the down payment needed, and the possible penalties.
3. Shop the Total Loan Amount
When shopping for an auto loan, you should look at the total loan amount instead of the monthly payments. Some lenders will try to convince you to get a loan from them by offering lower monthly payments. While their offer may look good, you may end up paying more interest. Look at the total loan amount so you know how much you’ll ultimately pay.
4. Compare Loan Quotes
After you’ve done your research and have different quotes, take time to compare them. Compare the terms and conditions and check the monthly payments and the total loan amount. When comparing the quotes, keep in mind that the longer the repayment period, the more interest you’ll pay over time.
You can also approach your bank and inquire about loan prequalification. This will help you know how much money you can get. Once you get an auto loan prequalify, most lenders will be willing to offer you an affordable loan. You have the upper hand when negotiating with loan providers.
5. Read the Fine Print
Outstanding auto loan balances in the U.S. hit $1.29 trillion in the third quarter of 2021. Some car buyers default on their auto loans because they fail to read the loan agreement thoroughly. Before you sign the loan agreement, make sure you understand the terms, potential penalties, and mandatory clauses. That way, you’ll avoid defaulting, getting penalized, or getting into legal trouble.