4 Strategies to Get a Low Interest Rate for an Auto Loan

Car buyers can get a low interest rate on an auto loan by having the strongest application possible, finding a competitive lender or by lining up a co-signer with a strong credit score. The following information offers four strategies for landing a low interest rate auto loan.

Strengthen Your Credit Score

A strong credit score is a key factor in a strong application and in earning a low interest rate on your auto loan. Everyone who borrows has a credit history maintained by the three U.S. credit reporting bureaus, Experian, Equifax and TransUnion. This credit history contains a record of all your borrowing - including credit cards - and any negative activity such as late payments, missed payments, foreclosures or bankruptcies. This information, put through a proprietary calculation by the Fair Isaac Corp., yields your FICO credit score.

The best way to have a good credit score is to pay all loans on time and not have excessive loans or credit card applications. If you have negative information on your history, it will remain there for three years, longer for foreclosures and bankruptcies. There is no quick fix for raising your score unless there are mistakes in it. You are entitled to one free review of your credit history each year, although it is less than $40 to buy it out right. Check your history for mistakes and notify the credit bureau.
The highest score is 850. The median U.S. score is 720. Below 620 is considered a poor score.

Reduce Lender Risk

The interest rate you pay is based on the risk assumed by the lender for lending you money. The higher the perceived risk, the higher your interest rate. You can get a low interest rate, or a lower interest rate, by reducing this risk.
Make sure your income qualifies you for the loan you want. The lower your debt-to-income ratio the lower rate you can earn. Keep your loan less than five years. With longer loan terms the risk to the lender is perceived to be higher. You can also increase the amount of money you put down to get a low interest rate. A larger down payment decrease your loan-to-value ratio. This means you are borrowing a lesser percentage of the vehicle’s value.

Shop Lenders

All lenders are not the same. Often, auto dealers offer low introductory rates which spike after a given time - six months to a year. You can find a low interest rate on an auto loan by shopping lenders. Banks and credit unions often have more flexibility in interest rates they offer.

Get a Co-Signer

Even if you have a low credit score and a weak application, you can get a low interest rate on an auto loan. If a friend or family member is willing to co-sign the loan with you and they have a stronger financial position, the loan terms - including interest rate - will be based on their credit rating.

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