When buying a new car, you’re probably wondering whether it’ll fit all of your family members or loved ones, has enough storage space or will last a long time. The interest rate for your new car is likely one of the last things you think about. However, the interest rate is a crucial part of the expense of buying a car and could affect your overall financial standing.
Since your total auto loan payment will depend on the interest rate, or annual percentage rate, here are tips to lower your interest payments:
1. Negotiate a Lower Purchase Price
Before you sign your name on the bottom line and declare yourself the owner of a new car, consider whether the price quoted by the dealership is the best one. If you feel you could get the car at a lower price, haggle it down. According to Bankrate.com, car buyers often make the mistake of not negotiating the purchase price, opting instead to focus on the monthly payment. However, buyers may not realize that they could get a lower monthly payment if they negotiate a lower purchase price in the first place.
2. Check Your Credit Score
Since your interest rate will likely be determined by your creditworthiness, it’s crucial to request your credit report and check your credit score before applying for loans. Knowing your credit score beforehand will give you an idea of what the interest rate for the auto loan will be so you can work toward getting a lower rate.
For example, here are the breakdowns of scores provided by FICO on Jan. 15, 2015 for a 36-month auto loan of $10,000:
720-850: 3.194 percent
690-719: 4.577 percent
660-689: 6.676 percent
620-659: 10.307 percent
590-619: 15.305 percent
500-589: 16.575 percent
The highest tier of credit scores in the 720+ range has the lowest APR as lenders view people with outstanding scores as less risky to give the loan to, granting them a smaller interest payment than the average consumer. People with this credit range also have the lowest monthly payment with $292 based on the scenario above.
As the score drops for consumers, the interest rate increases because lenders see them as more of a credit risk.
On the other end of the credit score spectrum, consumers with a poor credit score in the 500 to 589 range could have an APR of 16.575 and monthly payments of $354, almost $60 more than consumers with the top credit scores.
3. Make a Large Down Payment
If you have the funds for a large down payment for your car, move forward with putting more money down. A bigger down payment will reduce the amount of your loan and ultimately how much interest you pay each month and during the life of the loan. Use extra money or savings in your account to grow your down payment before agreeing to the total financing amount. You can also use a loan calculator to see how much you will save by putting down a greater down payment for your car.
4. Get a Shorter-Term Loan
With a mortgage, the longer the term, the more you’ll likely pay in interest. This is also true for car loans. While the loan payments for the car will be smaller with a longer loan term, the total interest you will pay will be higher. As the life of the loan increases, the interest may accumulate over time faster and it will take longer for consumers to chip away at the principal. To save on interest, choose a shorter-term loan. Edmunds.com said customers could save thousands on interest by choosing a five-year loan instead of a seven-year loan.