To get the best interest rate on a car loan, shoppers should follow certain steps, such as researching lenders and getting preapproved before going to any dealership.
Check Your Credit Report
Your income and credit score will help lenders decide the interest rate and the amount you can borrow. Carefully check your credit report before applying for a car loan. Rectify any incorrect information or errors on the report, as they could lead to a loan denial or an offer at a high-interest rate.
If your credit score is poor or subprime (600 or less), and you can avoid buying a car immediately; in this case, it’s a good idea to wait for 6-12 months to improve your credit before you shop for a loan. Also, start making payments on time and pay down your credit card balances so you can qualify for a better loan.
Your credit history is just as important as your current credit score for many lenders. For example, if you have a decent credit score at present but defaulted on payments several times in the past, you may have to pay more.
Apart from credit requirements, you’ll also have to show stable work history and meet minimum income criteria.
Apply to Different Lenders
Auto loan lenders can be divided into the following four groups:
– Online lenders
– Local credit unions or community banks
– Big national banks
– Dealership financing
Even if you want to proceed with dealership financing, it’s important that you compare rates from the first three lender types. Your own credit union or bank might give you a preferred rate. You can also research and compare multiple auto lenders online.
Get Preapproval
When applying for a loan, you might be pre-qualified or preapproved. Here’s how they’re different.
Pre-qualification gives you an idea of what kind of loan amount and interest rate you could be offered, based on a review of your credit history. This credit check done by the lender will not lower your credit score since it needs only a ‘soft’ credit pull. Keep in mind that this estimated rate is subject to change once a complete credit check is done.
Preapproval needs a ‘hard’ credit pull, which might temporarily lower your credit score. However, here, the lender has detailed information about your credit history and personal information, so the estimated loan rate will be closer to the final amount you’ll get once your loan is approved.
If you’re genuinely ready to invest in a car, preapproval has many advantages, including protection from marked-up rates and more negotiation power at the dealership.
