If you cannot afford to buy a car with cash, it means that you certainly are interested in learning new ways to lower the car loan interest rate. Here is what you should do:
First, you could pay extra payments on the loan as it will reduce your outstanding principal balance. The finance and interest charges are accrued based upon the outstanding principal, which means that the faster you’ll reduce the principal, the faster you’ll lower your interest charges. Your objective here would be to reduce the principal in order to lower the base for your finance charges.
If you cannot complete the first step, you could send the loan payments earlier than the due date. For example, if you must pay until 15th of the month and you choose to pay on the 1st, you will not have to pay the 14 days of accrued interest which means that a little bit more of your payment will go to the principal.
If you cannot make the payments earlier, try to make them on time. Not only you will improve your credit score but you will also avoid paying for penalties due to late payments. If you do indeed miss paying one, you will be assessed a late payment charge. Needless to say that if you miss payments your credit score will suffer.
It is recommended to get a copy of your FICO score as it is the same with your credit score. The higher this score is, the lower your interest rate will be. During the period of the loan, if you notice that the credit score has increased, you could refinance the outstanding balance.
Here are the most relevant factors that determine your car loan interest rate:
a) Lender – unless you choose to borrow money from a private source, you are going to work with a bank, a credit union or one of the automaker’s financing arm. Each scenario has its own pros and cons;
b) Car – it depends on what car you are buying. If it is new or if it is used. Most likely, a new car will have lower rates;
c) Length of the loan – basically, the longer the term, the higher the interest rates. There are some companies that offer 0% financing on 5-year loans. However, even these offers have their downsides so be careful;
d) Credit score – as mentioned before, your credit score will influence how much you will be paying for the interest. If it is good, you will be paying less.
It would be best to use your home equity to lower the interest rate of a car loan. Both a home equity loan and a home equity line of credit (HELOC) can often provide lower rates in comparison to traditional car loans thanks to the fact that these are secured against the value of your home. Of the two aforementioned choices, the second one will most likely offer you the lowest initial rate. The downside is that due to the fact that the rate is variable, you are vulnerable to the possibility of increased payments if the rates rise. For this reason, this type of loan is suitable for car loans of 36 months or less.
As mentioned before, even 0% financing deals can get messy. Let’s take for example that you want to purchase a vehicle that costs $16,000 and can pay zero interest for three years through the car dealer or get a $2,000 rebate. Your monthly payment for this car would be $444, 44. If you decide to take the rebate and finance through a bank at 5%, you will have to pay less per month – $419, 59. So, you will save $24, 85 per month which means that over the three-year period of the contract, you’ll end up saving $894, 60.
For getting a lower car loan interest rate you might want to check out independent financing. Dealer financing is in the vast majority of the situations more expensive in comparison than car loans obtained through banks, depending upon your credit situation. There are many cases in which the dealer of the car doesn’t make any money from selling you the car, but they get their profit from financing.
There are many car dealers out there that will try to get you to tell them how much money you can afford to pay every month, leaving room for them to raise your interest rate up to the monthly payment level you told them. After that, they have the possibility to sell this loan to a lending company and get a commission based upon the difference between what you are paying in interest and what the bank charges. This can turn out to be very costly for you. To give you a relevant example, for a 48-month / $20,000 car loan, the difference between a 7% interest rate and a 9% one is about $900 over the loan’s term.
As you can see, choosing the most suitable financing option for a car can be a little bit tricky. For this reason, it would be best to do a little bit of research before choosing one. Better safe than sorry.