Whether you are purchasing a new or new-to-you car, getting the best deal on financing is crucial. Thankfully, there is a long list of things you can do to ensure you find the best auto loan to meet your unique financial situation.
Here are the three initial steps you should take to obtain the best auto loan terms and interest rates:
Step 1: Take Control of Your Credit Score
Your credit score generated by credit reporting agencies is used to gauge whether or not a lender should loan money to you. Since a good credit score is paramount in successfully obtaining an auto loan, you need to know your number.
If your credit is excellent, start looking for a lender to get preapproval for an auto loan. However, if your credit score needs improvement, take the necessary steps to improve it. For many, this means paying off lingering collection accounts, closing unused accounts, and ensuring no errors exist on your credit report.
You can have someone co-sign for your auto loan if you have bad credit from an eviction, bankruptcy, or other long-term credit-damaging situation. A co-signer with excellent credit will garner you a lower rate. However, you damage their credit if you don't make the payments on time. If you stop making payments, your co-signer will be on the hook for the entire loan balance!
Step 2: Get Preapproved for an Automotive Loan
Just as you can get preapproval for mortgage loans, you can also get preapproved for vehicle loans. Obtaining preapproval is a great way to take your time and ensure the loan you take out has the best rate and terms possible.
You can apply for a preapproval from credit unions, banks, and online auto loan services.
Step 3: Understand the Total Cost of Various Loan Options
When getting pre-approved for your car loan, take the time to compare various offers. Don't just look at the interest rate. Instead, look at the total cost over the life of the loan, which includes:
- the down payment
- the principal amount borrowed
- the interest cost over the entire loan term
These calculations will show you can save a significant amount of money by making a larger down payment, obtaining a lower interest rate, and shortening the loan term.
When you have a larger downpayment, this not only reduces the principle but also saves a lot of interest over the loan's lifespan. Also, by making a larger downpayment, you show lenders you have a financial stake in the car. This often results in a reduction in the interest rate for your auto loan.