Although they’re one of the easiest ways to travel to work, cars are not affordable for everyone. You might want to go in for a good used car, but you would still need a good credit score when looking for a car loan.
Statista reports that, as of the date of this writing, car loan interest rates hover above a good 4.21%. The average amount of car financing, on the other hand, was around $32,187 by the end of 2019 in the United States.
Most third party institutions like banks require you to have a good credit report before they grant a loan – often a FICO score of 620 or above.
Don’t worry, if you are among those unfortunate people whose credit score has taken a beating, there is another alternative. Discover the benefits of buy here pay here (BHPH) car lots.
The Top 7 Ways to Reduce Your Interest Rate and Save Money on Your Car Loan
Both major financial institutions and Buy Here Pay Here car lots provide loans with interest. Nobody likes to pay it, and the higher it is, the more worrisome it becomes. However, there are ways to reduce the amount you pay as interest on car loans as well as ways to reduce the cost of your loan in general.
Refinancing is one of the best ways to reduce the overall cost of your used car loan. As of this writing, although interest rates are starting to climb again, they’re still lower than they were before. So, refinancing your car is probably the right thing to do even if you do not mind the interest you are paying now.
So how does this work?
Suppose, you had bought a car with the help of a loan for which you pay 18% interest, you can go to a bank or credit union that will most probably agree to pay off the current loan in full by providing you a loan with a lower interest rate.
You can then use the savings on your payment to pay off your loan even faster, thereby reducing the interest you pay even further.
As a result, you can save quite a lot of money on your monthly loan payments, and you may even use the saved money to pay off the current loan even quicker, saving you even more money.
2. Look for loans with lower APR.
Before you read on, it is imperative that you understand the fundamental difference between APR and interest rates.
Interest is the monthly fee charged as a percentage of your principle that you pay to your lender. APR, on the other hand, is the annual amount of money you pay as interest and additional fees levied by the lender.
So, the APR rate is higher than the interest rate. Sometimes, you may see that while the interest rate is low, the APR is high. The best thing to do in this scenario would be to avoid borrowing such a loan.
The higher the APR, the more you pay. So, if you are looking to save money on car loans, be sure to ask for the APR and always go with the lowest one comparatively.
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3. Don’t always go with the lender your dealer recommends.
As far as car loans are concerned, it is always better to ask around for the best lenders around.
Your dealer might most probably recommend you one, but it might be because the dealer gets a commission from the lender for every customer he lures into getting a loan from their company.
While dealer recommended lenders maybe good, they are not always the best around.
4. Don’t borrow too little.
How do lenders make money on loans? By the interest you pay. So, the more interest you pay, the more profit they get.
Small loans are paid off far quicker than large ones. It means banks make much less money for the effort they put in than they would make if it were a larger loan.
So, how do the lenders negate this? By increasing interest rates on small loans. Either borrow large or save up and buy the car on your own instead of going for a small loan.
This probably looks like a terrible idea, but it is viable in certain circumstances.
If you are a person who needs to change a car every few years, and you happen to live in a state that only charges sales tax on the monthly payments instead of the entire cost, then leasing might even be a better option than buying the car.
Of course, you will not get ownership of the vehicle, but at the same time, since it’s a lease, the entire cost of depreciation won’t fall on you. In fact, the majority of it will be borne by the dealer. Not a bad deal at all.
6. Bring forth your bargaining skills
What most people do not realize is that interest rates and APR are negotiable. You can always use your skills to get the right deal from your dealer. And to your surprise, the revised rates might be a lot cheaper than you would have imagined.
7. Try to improve your credit score.
Yes, this probably is the most obvious way but this is also quite easily the best way.
A good credit score means that a lot of financial institutions would be vying to grant you a loan – and you can make a play on their eagerness by asking them to reduce the interest rates, most often than not, they will comply. To improve your credit score, you can:
- Pay off existing your loans weekly or bi-weekly instead of monthly, which means less interest amount too for you.
- Round up the payments so that you can get through them quicker, plus some loan companies look at minimum-only payments somewhat negatively if that’s all you do. It gives you a ho-hum credit history.
- Don’t forget to pay on time, as this could attract a penalty if you don’t.
- Before you go in for any loan, don’t forget to check the rate of interest. There’s a lot of variability among banks and credit unions on their rates.
Borrowing to buy a car is not something that should not be done carelessly, even if it’s a cheaper used car.
Research before you choose the right lender and right type of loan for you. It does take time to rebuild credit though, and a reason you might need to put your purchase plans on hold.
If you have already bought a car in the last twelve months, refinancing may be a good bet. However, again, to refinance successfully, you do need a good FICO score.