If you’re looking for a new car, you’re also likely shopping for an auto loan to pay for it. In this guide, we’ll explain what you need to do to increase the odds of you being offered a competitive rate.
What Is a Good Rate for Auto Loans?
What is considered a “good” interest rate on a car loan varies depending on the borrower. The interest rates on auto loans are determined by a number of factors. Some factors, such as the Federal Reserve’s benchmark interest rates, are well beyond your control. Other variables, on the other hand, are entirely within your control. Your credit score is the most crucial of these factors. All else being equal, applicants with higher credit scores will qualify for loans with lower interest rates.
How to Improve Your Chances of Getting a Better Rate
One way to secure a better interest rate on your car loan is to improve your credit score. You can do that by paying all your bills on time and by keeping your credit utilization ratio low. Your credit utilization ratio essentially compares how much credit you happen to be using at any given time with the total credit that is available to you. For instance, if your credit cards are all maxed out, and you have a car loan or personal loan, you will likely have a poor credit utilization ratio.
The vehicle itself is also important. In general, interest rates for new cars are cheaper than for old cars. There are several reasons behind this, but the main one is that lenders view used cars as riskier. A brand-new vehicle is less likely to break down or become unusable. Remember that the bank still owns the automobile until you pay off your auto loan, and thus, it is in their best interest to offer financing for a car that is in good shape.
One of the best ways to secure a better rate on your auto loan is by shopping around. Remember that different loans have varied terms and rates. By doing your research and picking the loan with the best rate, you can reduce the cost of the loan.
