You don’t have to spend big to get help with buying a car. When you’re choosing a loan, your best options is the provider that gives you the lowest interest rate. It pays to compare multiple lenders like banks, credit unions and private lenders. Keep reading to find out how to get the lowest interest rate loan for your new or used car.
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Low-Interest rates are usually reserved for those with good credit and a regular income. Here are five tips for finding the lowest rates possible for your next car loan.
A bank is more likely to view you as a financially reliable customer if you’ve held down the same job for several years — changing employers often can signal instability.
You’re far more likely to get a good deal and a cheaper car loan with a good credit history. To do so, make on-time, full payments each month and pay attention to your credit utilization ratio.
Lots of lenders are willing to lend you the full amount needed to purchase a car. But if you can afford a cash deposit or have a car to trade-in, you’ll borrow less and will likely get a lower interest rate.
Never accept the first low-interest car loan offer that you see. Always take the time to shop around and compare multiple offers. Be prepared to ask questions about loan terms, whether the rate is fixed or variable and if there are any penalties for paying off the loan early.
If you’ve already done some research and you know what other lenders are offering, use this information as ammunition to strengthen your negotiations with your preferred lender. Ask about discounts on your interest rate and if they’ll waive any fees to win your business.
What’s considered a low interest rate on a car loan?
Generally, the lowest interest rates you can find on a car loan are around 2% or 3%. However, any car loan with a rate under 5% is considered low-interest — and you’ll need good or excellent credit to qualify.
However, if you have less-than-stellar credit, the lowest rate you can get could be upwards of 10%. Since car loans are usually secured, they typically come with lower rates than an unsecured personal loan.
Who Actually qualifies for the lowest Rate?
Just because you see a particular lender advertising a low-interest rate for a car loan, don’t automatically think that’s how much you’ll end up paying. Those ultra-cheap interest rates may only be available to you if you have excellent credit or if you are buying a certain type of car.
How much does a low interest rate car loan cost?
Low interest car loans come with a few costs, but each individual loan will differ depending on the lender you apply to.
Here’s are some fees to watch out for:
The origination fee. This is the cost to set up your car loan. Lenders usually add this fee into your loan amount to be paid off with the rest of your principal.
Other monthly fees. Some loans could have maintenance fees to keep your account open.
Early or additional repayment fees. If you repay your loan early or make additional payments you may be charged a fee to make up for the loss of interest on your loan.
Late payment fees. Set up a pre-authorized payment to avoid fees for late or missed payments.
Consider your loan term
How much your car loan costs also depends on how long you take to pay it back. For lenders, longer terms are better because there’s more time for interest to accumulate on the loan.
Let’s assume you want to borrow $20,000. Over a 5-year term you might be quoted an 8% interest rate, but you’re offered a 7.5% rate if you accept a 7-year loan term. Let’s see how that would work out.
Low interest loan details
8% interest rate
7.5% interest rate
Total interest paid
If you choose to pay a 7.5% interest rate over 7 years, your payments would be almost $100 cheaper per month. This might seem appealing because it’s more friendly to a monthly budget. Unfortunately, even though the interest rate is cheaper, you’d end up paying $1,436 more in additional interest charges than if you had chosen to pay an 8% interest rate over 5 years.
You could always make additional payments and pay off your car loan sooner. But if you want to do this, check to see if you’ll be charged an early repayment fee that could wipe out any savings you thought you were getting.
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What factors influence interest rates?
Buying a brand new car might get you a lower interest rate, but a new car might not be what you need — or what you can afford. Here are some factors that can influence the interest rate you pay, even for a simple, inexpensive car.
Secured or unsecured loan. These loans are cheaper than unsecured loans because your car is used as security (or collateral) for the loan.
Fixed or variable interest rate. Variable rate loans can potentially be cheaper than fixed rate loans because variable interest rates are based on the prime lending rate, which can change periodically. However, if the prime rate increases enough, it may actually bump variable interest rates above fixed interest rates. If you’re willing to take the gamble, then you might want to go for a variable interest rate in the hopes of paying less. Otherwise, you may decide that a fixed interest rate is the safer way to go.
Age of the car. This determines the type of low interest car loan you’re eligible for. When it comes to used cars, some lenders won’t approve loans for cars that are 10+ years old or that have too many miles on them. Cars older than 20 years may need to be bought with a personal loan instead.
The loan term length. Calculate your monthly payments over three-year, five-year and seven-year terms to make sure you can keep up with the payments. Bear in mind that with longer terms, you’ll pay more in interest.
Employment status. If you have a stable employment history and can show documentation verifying your income, you can typically qualify for a low interest rate car loan. However, if you can’t verify any particular source of income (say, if you’re self-employed and have not kept good employment records), you might end up paying a slightly higher interest rate.
Your credit history. If you have a poor credit history, it’s likely you won’t qualify for those really attractive, publicly-advertised interest rates. Your search for car loans may be limited to higher interest rate options until you can improve your score.
If brokerage fees are charged. If you’re getting a car loan through a broker or car dealership, you might be expected to pay brokerage fees. Brokers generally charge either a percentage-based fee or a flat-rate free that can range from $200-$500.
The best loan for you will be the one offered with the lowest interest rate and minimal additional costs. Check what fees your lenders are charging you and ask for these fees to be reduced. If you can’t get them reduced, shop around for a more competitive deal and always compare your car loan options before you apply.
Not necessarily. If you qualify for the loan on your own, you won’t need one. However, having a cosigner could result in a lower interest rate because their income backs the loan as well as your.
This varies by person, but a good rule of thumb is that the total amount of your fixed monthly expenses (such as utilities or rent) shouldn’t exceed 50% of your income. With this in mind, calculate a car loan payment that will fit within your budget.
It’s possible, but unlikely. Your other options could include applying for a bad credit personal loan or reaching out to either a private lender or online lender directly.
Matt Corke is the head of publishing emerging markets for Finder. He previously worked as the publisher for credit cards, home loans, personal loans and credit scores. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time he has survived the dot-com crash and countless Google algorithm updates.
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