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How to Get the Best Auto Loan Rates

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In the market for a new or used car? If you’re planning to finance that purchase, you’re probably wondering how to get the best auto loan rate possible. After all, your car loan rate directly impacts your monthly payments and how much money you’ll spend on interest.

But what is a “good” annual percentage rate (APR) for a car loan? Recently, average new car loan interest rates have ranged from about 2 to 5 percent, depending on the lender, term (length of loan), type of vehicle (new or used), down payment, credit score, and other credit and vehicle characteristics. Add to that potential financing fees or interest markup, and your rate can really do a number on your wallet.

Fortunately, there are some tried and true tips for getting the lowest auto loan rates. Here are five ways to reduce your rate:

  1. Take care of your credit
  2. Generally speaking, the higher your credit score is, the lower your rate will be. Here are a few actions you can take to get your credit in better shape before taking out a car loan:

    • Check your credit report. Look for errors and contact the credit agency about any errors
    • Pay your bills on time. If you have trouble remembering, consider setting up automatic payments for the monthly minimum amount – you can always make an additional monthly payment if you’re feeling flush.
    • Pay down debt. Credit utilization, or credit card balance vs. credit limit, makes up a large portion of your credit score. A general rule of thumb is keeping your credit utilization ratio below 30 percent.
  3. Know the difference between APR and interest rate
  4. An auto loan interest rate is the cost to borrow money, expressed as an annual percentage (e.g., 3 percent per year). It’s pretty easy to calculate how a simple interest rate might impact your monthly payments and total interest cost using a loan interest calculator.

    APR, on the other hand, is not so straightforward. It reflects the annual interest rate plus some of the fees the lender is charging you, so it’s a more complete picture of your cost of borrowing. For that reason, and because APR can often be higher than simple interest rate, it’s best to use APR when comparing rates on auto loans.

  5. Closely examine dealer financing options
  6. A dealership can be a great place to buy a car, but it’s usually not the best place to get a car loan. Auto dealers often mark up the interest rate, charging as much as 3% more than the APR you might have qualified for with another lender. Do your homework beforehand by comparing rates at banks, credit unions and online lenders, then get pre-approved and show up at the dealer with your conditional commitment letter in hand.

  7. Make a down payment
  8. Buying a car doesn’t usually require a down payment, but making a down payment can be a good idea. One rule of thumb is to put 10 percent down on a used car and 20 percent down on a new car, but the ideal down payment is really the one you can afford. Generally, a larger down payment may reduce your interest rate. As a bonus, a higher down payment translates to a lower total interest cost, since you’ve reduced the amount you need to borrow. If you don’t already have a down payment saved up, it may be worth doing before pulling the trigger on your new car.

  9. Know your refinancing options
  10. If you already took out a loan but didn’t get the best car loan rate, don’t despair—the rate you got when you took out the loan might not be the rate you’re stuck with forever. Lending Club makes it easy and fast for eligible consumers to refinance their car loans online at a lower interest rate. You can check your rate in less than a minute without impacting your credit score. Lending Club estimates that borrowers on new loans could save an average of up to $1,350 over the life of the loan.1

How do you lower your car payment?

If you’re more concerned about getting a low car payment vs. getting the best car loan interest rate, refinancing can help you with that, too. When you refinance a car loan through Lending Club, you could be eligible to extend the term (or repayment period) and lower your monthly payments, giving you some extra cash in your pocket. Check your rate now to see if refinancing can make those payments easier to cover.

Sources:

1Based on analysis of 300,000 consumer accounts from Q4 2012 to Q3 2013 using credit bureau data. Assumes the consumer refinances with the lowest rate for which they are eligible and does not extend the term of the loan. Savings figure is based on a refinance from an average APR of 11.45% to an average APR of 8.2% and 60 months remaining on the term of the loan. Your actual savings may be different. A representative example of payment terms are as follows: an Amount Financed of $18,000 with an APR of 8.20% and a term of 60 months would have a monthly payment of $366.70.

2http://www.responsiblelending.org/state-lending/auto-loans

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