Get a Low APR on a Car Loan

APR stands for Annual Percentage Rate. It defines the amount you pay in interest for an entire year rather than just in the course of one payment period (usually a month). Getting a low APR on a car loan will reduce the amount of interest you need to pay on the car loan over time. Unfortunately, many dealers attempt to manipulate buyers into paying exorbitantly high rates. Doing your homework and knowing what your bargaining chips are will enable you to negotiate a lower APR.

Steps

Doing Your Homework

  1. Get your credit report. Most dealers will offer you an APR based on your income and credit score. Consumers are entitled to one free credit report per year from a credit bureau. The federal government authorized annualcreditreport.com to issue free credit reports. You can alternately choose from TransUnion, Equifax, and Experian, or see this guide.
    • Your credit report does not come with a free credit score. It would be nice to know your credit score, but you should be able to get an idea of how good your credit is based on the report alone.
    • The most common credit scoring model is FICO. The FICO score is calculated based on amounts owed (30%), new credit (10%), length of credit history (15%), credit mix (10%), and payment history (35%).[1] Shoot for a score as close to 850 as you can, but the upper 700s will get you good loan rates as well.[2]
    • Some credit card companies and banks will automatically generate a FICO score for you each month. You may receive this report for free, or you may have to pay extra for it.
  2. Check average interest rates in your area. You need to walk into the negotiating room aware of the rates others in your area are getting. There are numerous companies who compile interest rate reports that you can find with a simple web search. You can also check your bank’s website to find their rates.[3]
  3. Get proof of income. The second criteria car dealers use to determine your interest rate is your income. Bring a pay stub, tax return, or other government document that indicates your income. Showing job stability will help you get a better interest rate.
  4. Shop around for cars. Getting fixated on a dream car makes it easier for dealers to manipulate you into higher interest rates. Find multiple cars so you have the flexibility to walk away from a bad deal later on. Unless you are in the market for a rare car, you should be able to find several similar vehicles in your area.
  5. Find interest rates for dealers and banks. The best loan may be with a dealer, a bank, or a credit union – it just depends on the business or institution. Think about the perks of borrowing money from each place. Though one institution may have higher rates, it may be more convenient for you.[4]
    • Taking a dealership loan is not always a bad idea. In addition to the convenience factor, they may have special programs that help you keep your car on the road. Get information about all they offer with their loans, but be wary of ‘add-ons’ that pad the offer but have little value.[5]
    • Bank loans usually have lower APRs. Despite legislation to cap APR rates and loan markups in many states, you will often get the best deal at your bank. If you use multiple banks, you will be able to choose the best rate. Credit unions generally have much lower rates for auto loans. Look at the most up-to-date report from the American Credit Union Administration to see how banks and credit unions compare.[3]
  6. Consider a car ownership program. Many people with low income have little defense against exploitative loaning practices. There are numerous programs to help low income families obtain and pay for cars. Check with nonprofits to find a car ownership program in your area.[6]

Negotiating the Best APR

  1. Get pre-approved for a bank loan. Whether you end up taking the bank loan or not, having one in hand is a powerful bargaining chip when you talk to a car dealer. If you suspect a car dealer has made you a bad offer, talk to your bank. Until you sign the papers, your pre-approved APR from your bank may get you a comparable rate.
  2. Take a shorter term loan if possible. APR rates increase dramatically based on how long you choose to pay back the loan. A standard short-term loan is 36 months. This information will be in the loan information you found for your bank when you were doing your homework. A shorter payback time equals higher monthly payments, however, so evaluate whether you can afford the additional cost. On average, car owners spend about 11% of their income on car payments.[7]
  3. Make a large down payment. Car dealers prefer to receive as much cash up front as possible. Offering to make a larger down payment than necessary is a bartering chip you can use to get a lower APR. It will also decrease the size of your payments, and maybe even allow you to choose a shorter payback period.
  4. Exchange additional offers for a lower APR. Dealers use add-ons such as cash rebates, minor car improvements, and incentive programs to increase the cost of the car. Some of these, however, are ‘back-end products,’ meaning that they have not yet been installed or gone into effect. Tell the dealer you would like to trade some add-ons for a lower APR.[8]
  5. Be ready to walk away. Though it doesn’t apply to all, the usurious used car dealer stereotype exists for a reason. If you are getting a bad deal and they won’t budge, walk away. If you did your homework, you will have several more options. Even if they don’t give you a better deal to get you back to the negotiating table, you will probably have better luck with another more trustworthy dealer.



Tips

  • Consider having someone co-sign your car loan if you have bad credit. Otherwise, it is not likely that you will get a low APR on your loan.

Warnings

  • Remember that when you see advertisements for 0 percent financing and other low APR deals, those quotes are for people with excellent credit and income. Not everyone will qualify for the low APR that is advertised on car loans.
  • Dealers do not provide financing directly. They work with third-party lenders to find you a loan. Often, the dealer will add a percentage point or two to your APR, as a form of commission for arranging your financing. Therefore, you can often secure a lower APR by pre-arranging your car loan through a bank, credit union, or finance company prior to visiting the dealer.

Sources and Citations

  1. ↑ http://www.myfico.com/crediteducation/whatsinyourscore.aspx
  2. ↑ http://www.forbes.com/sites/learnvest/2013/05/30/shooting-for-850-why-i-want-a-perfect-credit-score
  3. ↑ 3.0 3.1 http://www.mycreditunion.gov/about-credit-unions/pages/interest-rate-comparison.aspx
  4. ↑ https://www.fdic.gov/consumers/assistance/protection/mortgages/looking/
  5. ↑ http://www.consumer.ftc.gov/articles/0056-understanding-vehicle-financing
  6. ↑ http://www.workingcarsforworkingfamilies.org/find-a-program/application-faqs
  7. ↑ http://money.cnn.com/2003/10/21/pf/autos/q_spendtoomuch/
  8. ↑ https://www.nclc.org/images/pdf/conferences_and_webinars/auto_webinars/presentations/presentation_sept16.pdf
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