For first-time car buyers, one of the most daunting parts of negotiating a good deal right now is interest rates. The average auto loan rate for someone with excellent credit is 5.25%, according to CNN. If your credit is less than perfect or if you’re buying a used car, expect that rate to be much higher.
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But don’t worry. You’re not without options for scoring a good auto loan rate. Here are five ways to get the best auto loan rates as a first-time car buyer.
Build Your Credit Score
The better your credit score, the better your interest rate. Super prime credit is between 781 and 850 and will get you the lowest rate.
Even if you can get your score between 661 and 780, you’d be at a prime level and still get a rate of around 7% for a new car. For a used car, you’d be able to keep it below 10%, which is not terrible.
Jamie Mitri, Finance Manager at Cumberland Hill Auto Sales and Service told GOBankingRates, “Ultimately, banks are looking at your debt to profit ratio and seeing the amount you are looking to take out. The finance manager can tell you why you were or weren’t approved for an auto loan and can give you tips to better increase your scores.”
To clean up your credit score, make sure any late payments are cleared up, read your credit report for any collections and make future payments on time. Good payment history makes up 35% of your score. Making payments on time can raise your score in a matter of months.
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Compare Lenders
When shopping for low auto loan rates, never take the first offer. Go to several lenders, discuss their reasons for the rates they offer and don’t settle. Getting a lender to offer you even 1% less can save you hundreds if not thousands of dollars over the life of your loan.
Joe Giranda, Director of Sales & Marketing at CFR Classic, a car transport company, told GOBankingRates, “I’ve often seen first-time buyers jump at the first offer they receive, but this can mean missing out on better deals.”
Another tip is to get pre-qualified from multiple lenders before looking for your car. This will give you negotiating power when you go to the dealership. Giranda says, “Pre-approval gives you a clear idea of your budget and can strengthen your negotiating power. It shows the dealer that you’re serious, and with a set rate in mind, you can avoid any temptation to overspend.”
Look for Ways to Reduce Rates
Many lenders will offer you a discounted rate for various special reasons. These can include:
- Opting for a shorter loan term: often, the shorter your loan term, the better your rate will be.
- Manufacturer incentives: Some vehicle manufacturers are trying to get rid of a surplus of cars, so they’ll offer deals like 0%. Shop around to see what’s available.
- Loyalty discounts: Many banks and credit unions will offer their existing customers lower rates for choosing them as your lender.
- Buying a certified pre-owned vehicle: Sometimes, dealerships are eager to sell their used vehicles that have been thoroughly checked and certified. You could get a deeply discounted rate.
- Agreeing to automatic payments: Many financial institutions will offer you discounted interest rates if you’re willing to set up automatic payments. That way, they’re more likely to get their payments, so they can afford to give a little.
Put Money Down
Typically, when your loan matches the value of the vehicle, your interest rate will be higher. This is because there is no equity in the car. In fact, if you were to wreck or lose the car at a later date, the value may be lower than the loan.
For this reason, lenders are often willing to offer discounted rates when you can put a good chunk of money down. In this case, the value of the car would be higher than the amount of the loan, which is a safer bet for a lender in the event they need to repossess the vehicle.
Get a Co-Signer
Finally, when all else fails and you’re still dealing with lenders offering you uncomfortably high interest rates, look around for a co-signer. If you have a family member with great credit, they can typically get you a lower interest rate by adding their name to the loan.
Because your name is on the loan, you also get to improve your credit with every on-time payment you make. It’s a win-win if you can find someone who will trust you enough to sign on to this debt with you.
Ultimately, your first car purchase will help you increase your credit score over time. Just be sure not to take on so much debt that you end up unable to make the payments. Plus, even if you get a less-than-ideal rate now, you can always refinance a year or two from now and lower your rate once your score goes up.
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This article originally appeared on GOBankingRates.com: How to Get the Best Auto Loan Rates as a First-Time Car Buyer
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