How to Get a Good Auto Loan Rate

If you are like most people, you don’t have nearly enough cash when it is time to replace your old car — that means you need to borrow the money. Whether or not that is a good idea, we will leave that discussion for another day. Assuming you are borrowing to buy your car, getting the best rate on an auto loan will make the monthly payments lower and make it easier to pay them on time.

Photo by Emilio Labrador via Flickr

5 Ways to Get a Good Auto Loan Rate

Do Your Homework

Looking for a low interest rate to buy a car is like most other things that involve negotiations — the better informed you are the more comfortable you will be when you actually sit down to talk.

  • Ask friends and co-workers where they got their auto loan and whether or not they were satisfied.
  • Visit banks and credit unions to see who can offer the best rates. If you have a good credit, they’ll be happy to talk to you.
  • Find out what dealer incentives are available and determine whether or not getting your loan through an auto brand credit company (like Ford Motor Credit or GMAC) would be to your advantage.
  • Compare the rates offered by the various lending institutions. Sometimes it may seem like comparing apples to oranges, but if you break down the details of each offer you can determine who offers the best rates.

Arrange Credit Beforehand

Having cash in hand (in the form of a preapproved loan) when you walk into a dealership may help you get a better purchase price for a car. By arranging credit with a bank or credit union ahead of time, it will essentially be a cash transaction with the dealer, which will simplify the process of actually buying the car. By doing your homework you know you have the lowest possible interest rate on a loan and also know approximately what your payments will be when you enter the showroom. This will help you have the confidence to negotiate the best possible deal you can.

Don’t Offer a Monthly Payment Amount

If the dealership is handling your loan application, don’t tell them you have a specific monthly payment amount in mind. They can juggle the numbers to get your payment to that amount, and you’ll end up over paying for both the car and the loan. You’re better off waiting for them to run the numbers and offer you a payment schedule. Then, you can compare those figures with what the bank or credit union offers. Wherever you get the loan, make sure the terms allow you to pay ahead or pay off the loan early without penalties.

Say No to No Money Down Offers

It’s best to put as much money down on the car as you can reasonably afford. This will lower the overall amount you’ll be paying for the vehicle, and also keep your monthly payments as low as possible. If you put a small amount of money down, or none at all, you’ll be paying a much bigger amount in interest over the life of the loan — a large portion of each payment will simply go towards paying interest and you won’t actually be paying on the principal.

Go With Short Term Loans

The shorter the terms of your loan the better off you’ll be. Carrying a high monthly payment, as much as you can realistically afford, will pay off the loan quicker and save even more on the amount of interest you’ll be paying over the course of the loan. Many lenders also offer lower interest rates on short-term loans, which help you save even further.

About the Author

By , on Mar 31, 2011
Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

Leave Your Comment (One Comment)

  1. G Werner says:

    Entering a large dealership with a cash transaction (or a pre-approved loan) will no longer get you a lower price for the car. Here’s why.

    If a dealership sells you a car for, let’s say, $20,000, they have two routes to go about it.

    First, they can take cash from you or use your lender. This results in $20,000 getting paid for the car. The dealership gets their cut, and the manufacturer gets theirs.

    Second, they can set you up with financing through a preferred lender. This results in you paying (over the life of the loan) more cash to buy the car.

    Many dealerships get incentives to encourage adoption of specific lenders (often their own, like GMAC or Ford Credit, for example). With a cash transaction, the dealership sees less money back from those incentives, and will need to make it up by negotiating less on the purchase price.

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