The Cheapest Ways to Get an Auto Loan
When you’re applying for an auto loan, you’ll likely spend days or weeks looking for the best deal—one that comes with the most favourable terms and cheapest interest rate and fees. However, this is usually not an easy task because a lot of factors come into play, such as your budget, creditworthiness and vehicle price.
And then there’s the time constraint. You will need to do your car loan shopping in a short time to minimize the negative effect of hard inquiries on your credit profile.
A hard inquiry is triggered when a potential lender requests to check your credit report before deciding to approve or deny your car loan application. This record means that you are actively applying for credit, causing a temporary drop in your credit score.
To find the best auto loan deals within a limited time, here’s what you should do:
1. Know your borrowing power
Your credit profile and score greatly affect your borrowing capacity or how likely to get approved for financing. Thus, it is important to know your credit standing before taking out any loan. If you have a stellar credit record, you have strong borrowing power, allowing you to get approved for a car loan fast. You can also negotiate for the best interest rate and term. If your credit score is less impressive, on the other hand, you can work on improving the factors that cause your credit score to drop before applying for any car financing.
- To know your credit standing, request a copy of your credit report from the credit reporting bureau. In Australia, the three major CRBs include Equifax, Experian and illion. You are entitled to a free copy of your credit report from these agencies every year.
- It is best to get separate copies of your credit report from each agency. The information that each report contains may be slightly different because some lenders submit information to only one or two CRBs.
Use our Free Credit Check to check your credit history before applying for a loan.
2. Improve your credit score
Unless you have an impressive credit profile, it is smart to work on improving your credit record first before applying for a car loan. This will help you get a lower interest rate and better terms.
Credit Report Dispute
Start by reviewing the information in your credit report. Are all the details accurate or do you find errors or false claims? Remember that certain information has a big impact on your credit score, which is the numerical representation of your creditworthiness. For instance, you may find an erroneous record of an unpaid account. This single error greatly affects your credit score because payment history makes up 35% of your credit score.
- To dispute the false information, send a letter to the CRB and ask them to correct the information.
- Attach any supporting documents you have.
- The CRB will forward your dispute to the organisation that made the erroneous claim for investigation.
- The organisation is expected to respond to CRB and verify any change or update that should be made from your credit report.
- The CRB will then notify you of the results of your dispute claim.
- Generally, a credit bureau dispute resolution takes around 30 to 45 days.
Removing Bad Credit Records
If your bad credit record is simply a result of poor credit management in the past, see if there are any negative information that can be fixed.
- Settle any late payments by making a lump-sum payment.
- For charge-offs and collection accounts, try to negotiate with your lender or debt collector to have them removed from your credit report in exchange for a fee.
- If you have outstanding judgements to be settled, make payment arrangements within 30 days or repay the debt in full.
- You can also settle past due accounts through debt consolidation or refinancing.
Building Good Credit Habits
If you have active loans or credit lines while seeking for car financing, make sure that you are making on-time payments and keeping your credit card balances below 30% of the credit limit. It is also best to pay off any outstanding loans before taking a new one.
Aside from managing your finances well, also see to it that you maintain positive cash flow, practice good account conduct and pay your bills on time. Your record of on-time payments on phone and utility bills can be used to raise your credit score through Experian Boost.
3. Get auto loan quotes from various sources
Once your credit score improves and your profile is as clean as it can get, it’s time to do your car loan shopping.
When rate-shopping for auto loans, all hard inquiries made within 45 days are typically counted as one. Use this window of time to make inquiries and get quotes from banks, credit unions and online lenders. These different institutions set different vehicle financing criteria and packages that may or may not be ideal for your needs and financial situation. The more information and quotes you get, the better you can compare interest rates and terms and select the best one.
- Banks are usually the cheapest car financing lenders if you have a good credit standing and if you have already dealt with them in the past. Credit unions also have affordable auto loan programs because they are non-profit. Both of these lending institutions can offer interest rates that are less than 10%.
- Online lenders generally provide a quick and easy-to-fill-out quote request form online, allowing you to compare car loan interest rates and terms fast. They also have less overhead costs than brick and mortar financing agencies, which allow them to offer affordable vehicle financing options.
Do not hesitate to tell one lender about a great car loan offer that you get from another lender. The car financing industry is very competitive. Each lender is likely to counter-offer you with a better deal if they know that you’re considering options from their rivals.
4. Check for 0% financing from car manufacturers and dealers
Some automakers and car dealers have a finance division that offers car financing at 0% interest rate to sell more cars and attract more customers. Generally, it is offered in the summer months to boost sales for the outgoing model year before its demand subdues in the other months. You can usually find this offer in selected Ford, Subaru and Kia car models.
- The requirements for 0% car financing can be tough, including established credit history, a high credit score, and a stable source of income.
- You may still qualify if your credit score is slightly lower as long as you have a solid history of on-time payments on previous loans and loyalty to a particular car brand.
- Sometimes, you may also need to provide a large down payment for the loan.
Before taking out a 0% car loan deal, make sure that you understand its terms and conditions. Most 0% car financing is only available for a short-term of two or three years, which may be harder to pay off if you don’t have enough money for repayment. Some unscrupulous dealers may also charge a higher sticker price for the vehicle because they have actually included the interest rate in the sticker price.
5. Determine how much you can afford
Calculate your possible overall expenses for the car loan before taking out one. This includes your monthly payments, down payment, associated fees. Some auto loan deals may appear affordable with long repayment periods. Remember, however, that the longer the repayment period, the more interest you will pay over the life of the loan.
- The large down payment you provide to secure the loan can reduce your monthly repayments. However, this amount may not be easily accessible. A typical down payment for a car loan is 20% of the vehicle’s purchase price. It’s better if you can afford a bigger amount, however, as it will further decrease your monthly payments.
- The monthly payment amount, on the other hand, is greatly affected by the term of the loan. Long-term financing makes repayment smaller because the total loan amount is stretched over a long period. This makes financing a luxury vehicle seem affordable.
If you can provide a larger monthly repayment, do so. Aside from allowing you to pay off your debt fast, it can also lower down your risk for negative equity. A car’s value depreciates quickly. Sooner or later, you could be paying more money on your loan than how much the car exactly sells for.
Ideally, it is best to keep the monthly repayments affordable to avoid running out of money while having a debt. Unanticipated events, like losing a job or the family provider, can affect your income. If you spend too much on debt repayments, your budget may not be enough to cover other expenses or save money.
To determine how much you can afford on a car loan based on the vehicle purchase price, deposit, loan term, and credit score use this Car Loan Calculator.
You can also discuss your options with a lending manager who can discuss your car financing options and help you find the best deal for your financial situation.