3 Steps to Getting the Best Auto Loan Available
You can save just as much money by getting the right auto loan as you can by negotiating the price of the car.
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Let me start by telling you how not to get the best auto loan available. Far too many auto buyers make the mistake of walking into a dealership and focusing all of their efforts on finding a car or truck and negotiating a deal. Then when the time comes to pay for it, they just walk into the dealership's finance office and accept whatever loan they're offered.
What many people don't realize is that smart shoppers can save just as much money, or even more, by knowing how to get the best possible auto loan as they can by negotiating a good deal on the car itself. With that in mind, here are three ways to make sure you get the best possible financing on your next automobile.
1. Do some work on your credit
Before you start shopping for a car, it's a smart idea to check your credit score. The FICO® Score is the version most lenders use, so that's the best one to check.
Here's why. Your credit score can have a huge impact on the APR you can get on your car loan. To illustrate this, here are the national average rates on a 60-month new auto loan and what this means if you're buying a $30,000 vehicle.
Data source: myFICO. Rates as of March 27, 2019.
While it can take years to improve your credit score dramatically, it's completely possible to boost your score by a significant amount quickly. For example, if you pay off some credit card debt, your score could jump. It could even help your score to ask your creditors for higher limits -- one of my favorite credit-improvement hacks.
Based on the data in the chart, the average car buyer with a 710 FICO® Score will end up paying over $1,100 in additional interest on a $30,000 vehicle as compared to the average buyer with a 720. And if you're just a few points away from the next credit tier, giving yourself a boost can be easier than you might think.
2. Get the shortest loan term you can reasonably afford
Over the past decade or so, new cars have become much more expensive on average, and car loan terms have become longer in order to keep monthly payments affordable. A 72-month car loan is now the industry standard, while 48- or 60-month loans used to be more common. Loans of 84 months or even longer are now available.
However, just because you can stretch your car loan over six or seven years doesn't mean that it's a good idea. From a personal finance standpoint, you're better off choosing the shortest term that you can afford on a monthly basis.
There are two reasons for this. First, a shorter loan term means you'll pay less interest. As an example, a borrower who gets a $30,000 auto loan at 6% interest will pay about $1,000 more in interest on a 72-month loan than they would on a 60-month loan.
Second, shorter loans represent lower risk to the lender, so they also tend to have lower APRs than longer-term loans. This can result in even more savings.
3. Shop around -- and not just for the car
As a final suggestion, one of the most important things you can do when getting a car loan is to shop around.
There's a provision in the FICO® formula that encourages rate shopping: All hard inquiries that take place within a two-week period are treated as a single inquiry. In other words, applying at a handful of lenders will have the same impact on your credit score as applying for just one loan.
Your bank or credit union is a good place to start, and it's a good idea to have a financing pre-approval in your hand when you start shopping. Many dealerships will match or beat documented financing offers, so check your rates at a few lenders before you start the shopping process.
Auto shopping isn't just about getting the best price
Scouring the classifieds for a great price on a car can be well worth your time. However, as you've seen, the right loan can save you hundreds or even thousands of dollars and deserves to be a major part of the car buying process.