With record-high vehicle prices and skyrocketing interest rates, car loans are costing Americans more than they have in the past 15 years. This one-two punch of higher prices and higher rates is pushing some buyers out of the market altogether, according to a recent Edmunds study. But what can consumers do to make sure they are getting the best deal possible on their auto loan?
The first step is to understand how car loan rates work. The most important factor in determining car loan rates is your credit score. Lenders will usually charge borrowers with excellent credit lower rates than those with low scores. The type of vehicle you buy will also play a role in your rate. The older the car, the more it will typically cost to finance.
A good rule of thumb is to purchase a newer vehicle car loan rates in order to get the lowest car loan rates. This is because older vehicles have been in circulation for longer and therefore may be worth less than when they were originally bought. Another factor that influences the car loan rates you’ll receive is the current federal funds effective rate, which is the rate financial institutions charge one another for borrowing money overnight. If the federal funds effective rate increases, lenders will usually increase their own rates.
It’s also a good idea to shop around and see what the different lenders have to offer when it comes to car loan rates. Many lenders will advertise their rates, and some lenders even allow you to submit a credit application for preapproval which can give you a firm idea of the auto loan terms that are available to you. This step is often overlooked, but it’s an excellent way to find the best car loan rates for your situation.
While it is true that your credit score plays a huge role in the rates you’re offered, you can still get a great rate without having a top-tier credit score. In fact, you might be surprised to learn how competitive the rates are for borrowers with scores as low as 500. You can find these lenders by looking through loan aggregators, such as AUTOPAY, but be careful. Some of these aggregators don’t disclose their partners, so you could be missing out on some great opportunities.
In addition to these factors, you’ll want to pay close attention to your debt-to-income (DTI) ratio. This is the amount of your monthly obligations compared to your gross income. Lenders will use this number to determine whether you can afford your monthly payments, and they’ll often charge borrowers with high DTI ratios a higher interest rate than those with lower ones.
The best car loan rates are offered by banks, credit unions, online lenders and loan marketplaces. While some providers have very competitive starting car loan rates, not everyone will qualify for those rates. For example, PenFed’s starting APR for a used car is 5.74%, but the lender only accepts applicants with a FICO score of at least 650.