This original article was first published here: What Is the Average Interest Rate for a Car Loan?
According to some research, the average auto loan is about $19,000. If you are thinking about buying a new car and using a car loan, you might be wondering how to get the cheapest interest rate to avoid paying more in the long run. Thankfully, we let you know what ways to get the lowest interest rates for cars, so make sure you keep reading!
Average Interest Rate
There are a few different ways to calculate the interest rate. Those include the lender, your credit score, what type of car you buy, and what term you choose. However, all of these factors will determine how high or low your interest rate is.
The car loan interest can vary depending on what type of financial institution you get your loan from. For example, big banks are normally the leading lenders. Credit unions are also a great place to get loans, and they’ll normally offer the lowest interest rates.
A bank will generally offer you a rate of around 3% if you’re one of their highest qualified customers. However, this interest can range anywhere from 6 to 25% for the average lender. If they have higher rates, they probably only accept loans for people who have worse credit. But in general, most lenders won’t want to loan to anyone who has a score below the 600s.
When you loan from a large bank, they’ll also have specific requirements to take out their loan. This includes the mileage and age maximum of the car you can buy. Some of them will also have a minimum dollar amount.
On the other hand credit, unions have a more flexible payment schedule, have lower minimums (or none at all). But they usually will only loan to people who are a member of their union. This means that it’s restricted to professions, social associations, or even locations.
You could also try getting a loan at the dealership that you’re purchasing the car from, and normally the introductory interest rate is pretty low. In fact, to draw people in, some of them are as low as 0 to .9%. However, this rate will generally go up after a certain length of time.
And to get those really low rates, you’ll need to have an excellent credit score.
By Credit Score
Speaking of credit scores, if you have a score of 760 or above, this will make you a prime applicant. You’ll likely be approved for interest rates that can be 3% or below. That’s because your credit score shows that you’re likely to pay off your debt, which means that it’s not as risky of an investment for the lender.
However, if you have a score that is 600 or below, you could have an interest rate of 20% or higher. That’s because the credit score doesn’t show that the applicant will be able to make all of the payments on time (or at all). If you don’t have a good credit score, you could end up paying over five times for the car than someone who has a good credit score would.
If you don’t have a good credit score now, you should hold off on buying a car (if you can). This way, you’ll be able to apply for a better loan that won’t cost you as much in the long run.
By Type of Car
The type of car that you want to buy will also affect the interest rate. You might think that you’re buying a brand new car, you’ll have to pay more than you would buying used, so your interest rate might be higher.
In fact, the new and used auto loan interests are actually different as well, and the used car rates are normally about 1% higher than they are for new cars.
That’s because buying a used car can be more of a risk for a lender. Used cars normally have already depreciated in value, and there’s a larger chance that something will break down. If the car no longer works, the financing company could end up losing money.
So even if you have a good credit score, the bank might still give you some higher interest rates to cover themselves as well.
Do you have an idea of how long you want to pay off your car? In general, most lenders will give you an option ranging between 24 to 72 months. There are shorter loans, and these sometimes have lower interest rates.
However, there are some loans that also go up to 84 months so that the cost of the monthly payment is lower. But if you choose a longer loan, you’ll have to pay more interest over time. If you take out a loan that goes on for a long time, with the interest, you may be paying way more than what the car was actually worth.
Getting a longer loan term may save you money each month in the short term, but over time, the accrued interest will actually start piling on and making the car more expensive than what it was really worth.
How to Get a Car Loan
So now that you know about what affects the interest rate, you can start looking at car finance rates and applying for loans.
One of the first things that you need to do is make sure that you set a budget. You should figure out how much you can afford without breaking your bank. Make sure you factor in some interest costs as well. You’ll also have to determine how much the auto insurance will be, the cost of maintenance, fuel, and more.
If you can wait to buy a car until the time is right, you can time it so that you buy a car during a big sale or towards the end of the month where salespeople are more likely to give you a better deal.
After you’ve done that, you can go to websites like Kelley Blue Book to get an average idea of how much a car costs. You should have done some research and have an idea of what kind of car you’re looking at.
Then, you can estimate how much the total cost of the car will be when you divide it up monthly for the loan term that you want. For a user car, you may want a slightly shorter-term length.
You should then take that price and shop around at different lenders in your area. Make sure that you talk to at least three different lenders before you decide to sign with them. This way, you make sure that you’re getting the best percentage that won’t break your budget.
After you’ve found a lender to work with, make sure that you get prequalified. This is the first step in applying for a loan. It will also let you see what the potential interest rates will be. However, they won’t do a hard credit check just yet, so that means it won’t hurt your credit.
Once you’re prequalified, you’ll have to complete an application. This is where you will fill in some of the details about the car you want to buy. You’ll have to also provide proof of your income, proof of where you live, and your driver’s license.
Buy the Car
Once you have that loan, you can become a cash buyer at the dealership. This way, you can avoid having the salesperson try and upsell you and add on luxury items that you don’t really need. Tell them that your approved loan is the only amount you have.
One way to lower the price of the car is to also trade in your old one. If it’s in decent condition, the dealership will apply the price of your trade-in to discounting your new car.
Once you’ve gotten your new car, start making payments on time. They’ll start as soon as you receive your loan. If you can’t keep track of when they are due, you can also set up automatic payments to ensure that a missed payment doesn’t hurt your credit score.
Learn More About What the Average Interest Rate is For a Car
These are only a few things to know about the average interest rate for a car, but there are many more factors that determine the rate. We know that buying a car can be stressful, but we’re here to help you go through the process!
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