Are you paying too much for your car loan?
In a recent feature on auto debt, Consumer Reports made the case that many car buyers, even those with good credit ratings, pay very high interest rates for their car loans.
According to a study conducted by the magazine analyzing 858,000 loans, 21,000 car buyers who had a credit score of 660 or higher were paying 10% or more APR on their car loans; the average interest rate for those car buyers with such a high credit score ranged from 3.73% to 5.94%.
There is no good reason why a car buyer with a good credit score should be paying 10% interest or more for a new car. Unfortunately, car dealers are under no obligation to offer the lowest interest rate available for a loan. Dealers can solicit multiple offers for a car loan, but it is possible they will not offer the best rate to their customers. Their profit margin can increase if they offer their customer a loan with a higher interest rate.
There are many things that a car buyer can do to get the lowest interest rate. Whenever I purchase a car, whether it is new or used, I obtain an agreement, in advance, from my bank or credit union regarding the interest rate and time frame for the car loan.
For example, I have found that my credit union, Penn Fed, generally offers me the best interest rate, whether it is for a new car or a used car. When I make my final vehicle selection, I let the dealer know the interest rate I have already negotiated in advance. I indicate that if they can offer me a better interest rate, I would use their lender; otherwise I would not. The dealer then has no incentive to offer me a rate that is higher than the rate I have already negotiated in advance.
Too many car buyers don’t do their homework regarding interest rates before selecting a car. That is a mistake. If you are in the market for a car, new or used, you should first verify that your credit rating is up to date. At no cost, every year you can request the latest credit report to ensure there are no mistakes in it. Visit AnnualCreditReport. com for your report. You can obtain a credit report from the three major credit agencies. If there are any errors, have them corrected as soon as possible. Any errors you identify must be corrected within 30 days. Most errors can be corrected within 10 to 14 days.
There are steps you can take to improve your credit score before you apply for a loan. For example, you should pay off any accounts that are late in payments; you should also consider paying off any loans that have small balances, especially if the interest rates are high. You could also cancel any accounts you are not using that you don’t intend to use in the near future. These steps should improve your credit rating and result in the best interest rates for your subsequent loan.
Making a large down payment will reduce the total amount of interest you will pay over the life of the loan. A good rule of thumb is that your car debt should not exceed 10% of your net income. CR reported that one in eight cars are repossessed because of late payments. Naturally, you should not agree to a loan in which you can’t afford the payments based on your other regular budget expenses.
Again, the best way to get a car loan is to get a commitment in advance from your bank or credit union based on your up-to-date credit rating. Then, when you discuss financing with your car dealer, you will be sure to get the best credit terms for your loan.