If you need a new car, you better be prepared for sticker shock. Kelley Blue Book reported that the average new car costs $36,843 in 2019. Most people can’t afford to pay for a new car with their own savings and instead borrow the money they need. According to Experian’s State of the Automotive Industry report, over 86 percent of new vehicles are paid for with a car loan, with most people financing $32,119.
You can score a better rate and save money on your new car by shopping around for a car loan before you buy one. If you’re planning on buying a vehicle, follow these steps to get the best deal.
1. Secure a loan before you go to the dealership
When most people buy a car, they go to the dealership, test drive a car, and then head to the financing department to apply for a loan right there. While applying for a loan through the dealership is easy, you might pay a premium for that convenience. You may end up paying a higher rate than you’d get if you looked elsewhere, and you could end up losing money.
To give yourself more power at the negotiating table and to score a lower rate, make sure you secure financing before you ever go to a dealership. By having the loan approved before you ever get there, you can negotiate based on the car’s total price, rather than worrying about payments and fees.
2. Review your credit
Whether or not you can qualify for a car loan and what interest rate you receive is dependent on your credit report and credit score. The better your credit, the better your loan terms will be.
For car loan purposes, lenders assign borrowers the following ranges:
- Super prime: 781 to 850
- Prime: 661 to 780
- Non-prime: 601 to 660
- Subprime: 501 to 600
- Deep subprime: 300 to 500
If you’re not sure where you stand, review your credit report for free at AnnualCreditReport.com and use CreditSoup to view your free credit score.
If your credit isn’t as good as you’d like, take steps to improve it before applying for a loan. Make sure you pay all of your bills on time and pay down any debt you may have, like credit card balances.
3. Comparison shop
Rates can vary widely from lender to lender. According to Experian, the average interest rate on a new car is 6.27%. However, the interest rate you receive is dependent on your credit score, income, and debt-to-income ratio.
For example, those with excellent credit — the super prime borrowers with scores between 781 and 850 — can get an interest rate of just 4.23%.
But those with poor credit, also known as deep subprime borrowers, could get stuck with a loan with an interest rate of 14.7%.
Get rate quotes from multiple car loan lenders before making a decision. You can often apply for a loan through major banks, credit unions, and online car loan lenders.
4. Choose your terms carefully
When comparing lenders, make sure you carefully review the lenders’ terms. Some lenders offer repayment terms as long as 96 months. A longer loan term can be appealing because it gives you a much lower monthly payment. However, you’ll pay far more in interest over time.
For example, let’s say you bought a car for $35,000 and qualified for a loan for the full amount at an interest rate of 8% and a term of 48 months. Your monthly payment would be $854.45, and by the end of your loan, you’ll repay a total of $41,013.70.
By contrast, let’s say you bought that car but opted for a loan term of 84 months at the same interest rate. Your monthly payment would be just $545.52 — freeing up money in your monthly budget — but you’d repay $45,823.42 over the length of your loan. Choosing a longer loan term would cause you to pay back $4,809.72 more in interest charges
When shopping for a loan, choose the shortest loan term you can afford to save the most money.
5. Submit a loan application
Once you find a loan with an interest rate and term you’re satisfied with, you can submit your loan application. Some lenders allow you to apply online, while others will require you to apply in-person at a branch location.
The approval process is usually pretty quick; you’ll find out if the lender approves you with one to 24 hours. Once approved, you can head to the dealership and buy the car you want!
Buying a car
Buying a new vehicle is one of the most expensive purchases you’ll ever make. Shopping for a car loan can help you save money and get out of debt faster, so make sure you do your homework before heading to the dealership. By researching and comparing your options, you can get a deal that works for your budget.
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