What Factors Determine The Interest Rate On Auto Loans?
Other than your credit score, there are a few other factors such as the car’s model and cost, the market rate, and your state of residence that will play an important role in defining the criteria that lenders take into account before offering an interest rate.
The Federal Funds Rate
Banks borrow money from the Federal Reserve (US Central Bank) for certain rates and periods.
The Federal Funds Rate at which the lender borrows money from the central bank influences the rate which will be offered to you.
These rates keep fluctuating and are set by the Federal Reserve.
The Car You’re Seeking
The rates vary on your choice of a new or a used vehicle. They also fluctuate depending on the make and model of the car.
Usually, if you choose a new car, you’ll be entitled to comparatively lower rates.
The State You Live In
The rates can also vary by your state of residence.
In some states, the government caps the maximum interest rate that can be charged by the lender.
Make sure to check state laws before agreeing to a rate.
Tips For Getting Better Rates
Now that you have a better understanding of the factors that influence the interest rate, let us share some tried and tested tips that you can use for getting better rates – even if you have a weaker credit score.
Save Up For A Down Payment
When you have a higher down payment amount available, the loan amount you need falls.
Accordingly, a smaller loan would mean that you’ll pay the interest on a lower principal amount. If you make a down payment, you might also get a lower interest rate.
The amount you borrow against the value of the car would affect your rate. Many lenders accept cash up front, trade-ins, or both.
Apply For Pre-Approval
If you’re stuck with bad credit, try applying for pre-approval from credit unions or banks that you already have a relationship with.
Compared to dealers and private lenders, unions and traditional banks are more flexible with the requirements.
With pre-approval, you have better chances of negotiating a lower rate on the loan so you can save further.
However, note that pre-approval doesn’t guarantee approval for the loan.
Getting A Friend Or Family Member To Co-Sign
Adding a co-signer willing to guarantee the debt, preferably someone with stellar credit, will improve your negotiating power.
If you’ve already qualified for a car loan, bringing in a co-signer can help you negotiate better rates.
This is a good idea if you’re sure you can repay on time given missed payments mean the lenders will reach out to the co-signer.
Getting A Co-Borrower
Unlike a co-signer, a co-borrower will have their name on the car’s title.
Co-borrowers sign the loan documents with you and are also considered a primary applicant.
During the loan approval process, lenders will determine the co-borrower's credit history, income, and expenses.
Combining two incomes can get you a lower rate, but it also means shared ownership of the asset.
Rate Shopping
You must compare quotes and rates from multiple lenders to figure out the best options.
This will help you get a better idea of the adjustments you need to make in your monthly budget.
If you’re not eligible for a loan from one lender, shopping for rates will uncover other dealerships or lenders which are willing to underwrite your loan.
Conclusion
Getting a low rate when you have a bad credit is a daunting task, but it is not unachievable.
If you take the required steps to build your credit before you start looking for an auto loan, it can help lessen some of the impact.
Save money from your daily expenses, define a budget, and compare different rates and quotes so you are in a better position to determine the best available car loans.
