Even though you may score a low monthly payment on an auto loan, a high interest rate typically means you'll pay more for the car over the life of the loan than you probably want to. However, you don't have to settle for a double-digit interest rate. Here are a couple of things you can do to reduce the rate you're charged to make you auto loan a little more affordable.
Improve Your Credit Rating
One of the top reasons why you're being charged a high interest rate is because your credit score isn't too great. It's commonly believed that people with low credit scores have a higher risk of defaulting on their loans. So, the lower your credit score, the more risk the bank is taking loaning money to; thus, the higher the interest rate the bank will charge for the privilege of borrowing cash to purchase the vehicle.
If you don't need the vehicle right away, a good course of action is to wait a couple of months and improve your credit score. Pay down some of your existing debt so that your credit utilization is below 30 percent, try to eliminate as many collections and other negative entries as you can, and start paying your existing bills on time. Even increasing your score from less than 600 to over 601 can cause the interest rate you're charged to drop four to five percentage points.
For those who can't wait to purchase vehicles, an alternative option is to have someone with a higher credit score co-sign the loan with you. The bank will either base the rate on the higher score or an average of both your scores, both of which can result in a better rate offer.
Shorten the Loan Length
Another thing you can do is reduce the number of years you'll be financing the vehicle for. Longer loan terms often lead to higher interest rates because the bank has to wait even longer to get all its money back. There is also an increased risk you'll run into financial problems and default on the loan.
Thus, shaving a year or two off the loan term may result in a lower interest rate. Be aware, though, your monthly payment will go up. If you want to keep your monthly payments low, then consider paying a larger down payment.
For more tips on scoring a lower interest rate on your auto loan, contact a local lender or a car dealership.Share