Getting the cheapest auto loan depends on your credit score, your car of choice, and your lender. Before deciding, you should do more research considering your preferences. But getting pre-approved gives you more flexibility while negotiating, and it could help you get a cheap car loan that saves you money. Know your budget, credit score, and best loan term before searching for a car loan.
Key Takeaways
1.Understand your budget
Experts say you shouldn't spend more than 20% of your net monthly income on costs related to your car loan. This includes the monthly loan payment, gas, and other costs. If possible, you should know exactly how much you can spend on a car, including all the extra costs of owning a car.
Keep your budget in mind while you look for a car that meets your needs. Use online data to get an idea of how much a car will cost and how reliable it is. Most of the time, the interest rates on new cars are lower than those on used cars, but used cars cost less overall.
2.Get a copy of your credit report
Lenders put a lot of weight on your credit score when figuring out if you can repay a loan. The less you pay in interest, the better your credit score. And if you want to get the best rate the lender offers, you usually need an excellent score. Before getting an auto loan, try to get your credit score as high as possible.
If you find errors on your credit report, you must dispute them immediately with the right credit bureau. If there is false negative information on your credit report, it could bring down your credit score.
Your payment history makes up 35% of your credit score, so it's important to pay off any past-due accounts and make payments on all your debt on time.
Your credit score will increase if your credit utilization rate is 30 percent or less. You can also decrease your credit utilization rate by putting all your debts into one payment.
Don't try to get any other loans or credit cards. If you go for too many hard inquiries in a short time, it could hurt your credit score.
Get prequalified with more than one lender
Applying to prequalify with more than one lender is the best way to find the best deal based on your credit score. Compare the interest rates of a few banks, credit unions, or online lenders by getting information from them.
Looking around, you'll better understand what's out there. Once you know what you're eligible for, you'll have a better idea of how much your monthly payment will be. Plus, if you do want to think about financing through the dealership, you can go into negotiations with a backup plan in place.
Have a 14-day window for loan application
Every time you apply for credit, a hard inquiry is made on your credit report. This drops your credit score by a few points and stays on your report for up to two years. Hard inquiries can also hurt your credit score for up to a year, so filling out many applications quickly can hurt your score.
Any loan applications you send in within 14 days count as a single inquiry, which keeps your credit score from decreasing too much. Remember that applying after this time could cause your credit score to drop and keep you from getting the best rates.
Figure it out
Even though a low annual percentage rate (APR) sounds good, it's not the only constraint you should be concerned with. Your old car's trade-in value, down payment, and loan length affect how much your new car will cost. After all, your car loan will cost less if you pay more upfront and less interest overall.
Use an auto financing calculator to figure out how much interest you will pay in total and how much you will have to pay each month. It's a useful tool, especially after you've talked to several lenders about prequalification and figured out what rates you can expect.
Most car loans have terms between 24 and 84 months. And even though a longer term means a lower monthly payment, interest costs more in the long run. Choose the shortest loan term you can afford to keep the total cost of the loan low.
To help you get financing, dealers work with banks, credit unions, and online lenders. Start your search for the cheapest car loan with them to avoid paying more interest on a similar loan.
If you already have an account with a bank, you can look for a car loan there. On top of a good interest rate, you might get a discount for being a loyal customer. Most dealers get their financing from banks, so you'll get the same service without paying a markup.
Since online lenders have to compete with banks and credit unions, their rates are usually about the same. Best of all, many work with people with bad credit. If you don't have a long credit history, this could be a good place to get a cheap loan.
Credit unions are not-for-profit. They often have rates and loan terms comparable to those of a bank. This means that they are one of the least expensive ways to get a car loan. But since you have to be a member to apply, it could take a few months and an active account before you can.
Most people's car loans are one of their biggest expenses, so work to find the cheapest car loan. Before buying a new set of wheels, figure out how much you can pay each month and how much the loan will cost. Find out the current auto loan rates and get pre-approved by several lenders to ensure you're getting the best deal.