Know how much you can afford.
It’s essential to know how much you can afford when you’re out car shopping for the best used car loan rates. To keep yourself within budget, you should stick to the 20/4/10 rule of car buying. This age-old car buying rule indicates you put down at least 20% of the car cost. Finance for no longer than four years, and make your monthly payment (including principal, interest, and insurance) no more than 10% of your monthly income. Know exactly how much you can afford. Having a budget will decrease the headache of looking at cars outside of your price range or getting multiple denials. Buying a vehicle that exceeds your budget places you in a financial bind for 3 to 5 years. A helpful tool to use is an auto loan calculator. You can enter data into a loan calculator to see what the monthly payment works out to be.
Be responsible with your car-buying experience and make sure to take your time before you make a purchase. A car does not last forever, and you will probably enter into another loan in less time than you think. Consumer Reports states that the average life expectancy of a new vehicle is approximately eight years or 150,000 miles. In undoubtedly one of life’s most significant and necessary expenses, it’s best to recognize that the five-year loan will start over again in another three. Plan sensibly. Remember that this is a recurring purchase, and the payoff period lasts significantly shorter than the payment period.
How can you lower your car interest rate?
Save up for a down payment and raise your credit score.
Saving for a down payment will help you save money in two ways. First, the more money you put down on the vehicle, the lower your monthly payment will be. Second, making a sizable down payment will lower the principal balance (the amount you’re borrowing), meaning you’ll pay less interest overall. For example, if you purchase a $20,000 car for a 48-month term and borrow money at a percentage rate of 10%, with no money down, you would pay around $507 per month and $4,345 in interest. Let’s look at the same deal with a down payment of $5,000. Now you’re financing $15,000 at 10%, which is around $380 per month and $3,259 in interest. Using this calculation, you would save $1,086 in interest alone.
Check your credit score. Your credit score is the number one factor in determining the best used car loan rates. How does your credit score affect your auto loan terms? Based on statistics from USnews.com, we can see average auto loan rates for used car loans vary in 2020 from 5.18% to 25.30%. This range is a considerable gap and easily represents how vital your credit score is when looking to get the best used car loan rates.
What is the average current interest rate on used cars in 2020?
Credit score to annual percentage interest rate (check Money FCU’s rates here):
750+ 5.18%
700-749 5.31%
650-699 11.55%
450-649 18.18%
449 or less 25.30%
If you have a trade-in vehicle, this works similar to placing money down. It lowers the bottom line price that you are looking to have financed. It reduces the amount you’re financing, meaning you have a lower monthly payment and pay less interest.
If you have bad credit, can you qualify for an auto loan?
Yes, in most cases, as seen above, you can still qualify but will pay a higher interest rate. The good news is that you can always refinance the auto loan at a lower percentage rate once you show good payment history. Each bank and credit union has different criteria for refinancing an auto loan. Still, the general recommendation is to make on-time payments for at least one year to raise your credit score and show good credit history. Once you have done that, you can move the vehicle loan to another bank or credit union to try and lower your payment and annual percentage rate. At Money FCU, our rates for those fair credit are incredibly competitive.
Another option to consider if your credit score is low is having a cosigner for your auto loan. Having a cosigner can significantly lower your annual percentage rate as it makes both parties responsible for the repayment of the auto loan. The bank sees a cosigner as being a more secure investment.
Is it better to finance a car through a bank or dealership?
Financing through the dealership will frequently cost you extra. Dealerships make money through the funding of the vehicle. They often have deals with lending institutions that will cost you more so they can get more. Going through a bank or neighborhood credit union will often get you a better interest rate.
What bank has the best used car loan rates?
Working with a local credit union, like Money FCU, will often get you a better rate than a third party lender with the car dealer or from a national bank. Credit unions can keep their prices lower due to their not-for-profit status.
Can you negotiate interest rates on car loans?
If you have been prequalified and approved for an auto loan, then you may be able to negotiate a better pre-owned car loan rate through the dealership. The dealership would likely be interested in getting your business. It can also help to ask if your bank or credit union will beat the rate you get from a dealer. It can never hurt to ask.
How do you get prequalified for an auto loan? Ask your bank or credit union for an auto loan pre-approval. The prequalifying process is pretty straightforward. Just go to your local credit union or visit them online and fill out an application. When applying, keep in mind the extra cost of sales tax, title, DMV, and dealer service fees. These can run you upwards of a few thousand dollars, so make sure you ask for a bit more than you intend on spending on the automobile. Once you’ve settled on a vehicle, you will let the bank or credit union know you’ve found a car. They will usually ask for a buyer’s order or bill of sale to complete the application. When looking into used cars sold privately, make sure you know your contract specifications. Some financial institutions will not provide funding unless it goes through a dealership.
Is it better to finance a car for 60 or 72 months?
It is always better to finance a vehicle for a shorter time due to the depreciation value of the car. Lending institutions don’t want the loan to drag out and the depreciation to exceed the amount owed on the vehicle. That’s why they offer better financing options for shorter terms. The trend in the car industry is longer-term loans because they can reduce your monthly payment and entice a car buyer into a sale. Still, they cost you significantly more in interest and will increase your used car loan rate. Your best option is always to get the shortest loan term that your auto financing budget can fiscally afford. You can read our other blog about 84-month car loans and how that is possibly the worst term for a car loan.
How can you get your car payment lowered?
Refinancing the vehicle loan is the best option for lowering a payment after the fact.
Does refinancing your car loan hurt your credit score? Refinancing a vehicle is treated the same as a new car loan. What happens is that the old auto loan is paid off by the bank, and a new loan is created. Therefore, it is a hard hit on your credit. It may briefly lower your score a bit but should not hurt it in the long run. The importance of making the payment on time is far more critical to maintaining a good credit score. So, if you need a little financial breathing room, refinancing the car loan to lower the payment can be a good option.
When is refinancing a car loan best? The best time to refinance is if a life occurrence has made a significant change in your credit score. The current loan has a high-interest rate, or the vehicle is relatively new, so that the value of the car has not depreciated.
Shop around within two weeks.
Our final bit of advice is not to drag out your car-buying experience over months. It’s best if you make all of your auto loan inquiries within a short time to avoid recurring hits to your credit score. The good news is that the three credit bureaus, Experian, Equifax, and TransUnion, recognize multiple inquiries for the same type of financing made within a short time period as only one inquiry. Credit bureau representatives suggest keeping queries to a limited two-week period to avoid the new pings against your credit. Each hit may drop your credit score by a few points.
With so many questions about the best used car loan rates, come on in and speak to a friendly customer service representative. Money FCU can answer all your used car loan questions. Call us today at (315) 671-4000 to get started!
