4 Tips for Lowering Your Car Loan Interest Rate

Your car loan interest rate will be the number one factor driving your total cost to finance the purchase of your vehicle. The lowest rates are always offered to those individuals with the best credit and highest income. Even if you do not quite fit this description, though, you can get a lower rate through the method you use to source and secure a loan.

#1 Prepare your Credit

It is okay to have a credit score under the ideal 730 or above. Your credit score may be low for a number of reasons, including a short credit history or high debt to income ratio. If you have a lot of debt, you may be a fine borrower so long as your income is additionally high enough to take on another loan. However, the low score should not be the result of recent missed payments or defaults. Car lenders are most concerned with the big red flags on your report, such as very recent mishaps with your repaying of installment debts. Prepare your credit by assuring you have no missed payments or defaults for at least 2 years before applying for a used car loan.

#2 Shop Around

You do not have to take the first loan offer you receive, especially if it is from a traditional lender like a bank. The lowest interest rates are usually available through dealers who are attempting to sell you both the car and the financing in order to make a double profit. There are also alternative loan sources, such as secured personal loan lenders, that may offer you more competitive rates. Shop around to these alternative lenders and find the lowest quote you can. You can use this quote to negotiate with a traditional lender if you would still prefer to use the bank for your financing.

#3 Lock in Terms

Terms and interest rates have an inverse relationship. Flexible terms, such as those that allow you to modify the loan easily in the future, come at the cost of a high interest rate. Banks typically offer more flexible terms. If you are willing to lock in loan terms and accept a less flexible option, then your lender may reduce your rate. Consider offering high monthly payments, a shorter loan and accepting higher fees should you modify the loan at any point in the future. All of these factors will drive down the interest rate you are quoted.

#4 Provide Additional Collateral

The less risky your loan is to the lender, the cheaper it will be for you. Aside from locking in terms, you can also offer additional collateral beyond the car itself in order to protect a lender if you default. Many lenders are afraid you will default and then leave them with a car that has dropped well below the value of the loan they have extended. Offering another automobile, a savings account or personal collateral can reduce your interest rate. In this case, though, you should be aware that any collateral is legally the property of the lender until the loan is paid off.

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