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Buying a new car can be both stressful and exciting as you get closer to buying your dream vehicle. A good way to make this process easier is to know how much you will pay if you need a loan to buy a car. Setting a good Annual Percentage Rate (APR) will save you money over the life of your loan and potentially get you more car bang for your buck.
What is an APR?
Every car loan has an APR, which is the annual cost that the lender charges you to borrow. It’s slightly higher than the base rate of the loan because it includes fees for servicing the loan — such as title and tax documentation, dealer preparation, and other transaction-related fees.
The higher the APR, the more you pay back to the lender over the life of the loan. Because of this, it is important to look around for the loan.
How a lender determines my APR
A car loan is secured by the vehicle to be financed. How much you pay for this loan – the APR – depends on a number of factors, including:
- Credit-worthiness: Your credit rating is a key factor in determining the interest rate you can get on a car loan and the overall APR. The higher your credit score, the more likely you are to get a lower rate.
- Down payment: A down payment helps reduce the amount of credit you need to borrow and therefore the overall cost of the loan.
- Vehicle type: Whether the vehicle is new or used plays a crucial role in the APR you pay. In general, new cars tend to have lower interest rates than used cars. Also, automotive brands with a track record of reliability, such as Toyota or Honda, add to the model’s resale value and could result in a lower APR.
- Personal Stability: Proof of stable employment shows the lender that you have the income to pay back the loan, giving you a better APR. Lenders also look more favorably on a borrower who has lived at their current address for some time.
What is a good APR based on my credit history?
To get a good starting point for your APR, let’s start with the average interest rate on a car loan based on specific credit rating bands. Vehicle buyers with an excellent credit rating of between 780 and 850 were able to obtain a new car loan at an average interest rate of 2.47%. Conversely, buyers with the lowest credit scores of 300 to 500 saw average rates of 12.53%, according to Experian. Here is the breakdown of interest rates based on creditworthiness for new and used car purchases.
Shopping for a car loan
There’s no shortage of lenders vying to lend you money for the car of your dreams. And with that comes a wide range of terms and rates for car loan packages. Here are the three most common types of car lenders.
1. Online lenders
The easiest place to start is with an online search, which will quickly uncover the myriad of online lenders to choose from. You can easily find their estimated prices and terms as well as payment calculators online.
2. Financial Institutions
While searching online is a good place to start, you can get more detailed information by visiting a financial institution like your local bank or credit union, or by pre-applying online. Start your search online or call directly and speak to a loan officer or auto loan expert.
Ask if they offer pre-approvals to take you to the dealer, as this will give you an accurate estimate of how much you qualify to borrow and at what APR. It also gives you stronger bargaining power with the dealer.
3. Car dealerships
Auto dealerships can offer quick and easy financing for all types of buyers by partnering with auto finance companies. While it may seem easier to let the car dealer do the loan shopping for you, it’s a good idea to do your own research on interest rates and terms before you jump in to make sure you’re getting the best possible deal.
How do I know I’m getting a good APR?
To find out what APR is best for you, the table above will give you a good idea based on your credit score combined with shopping online for current interest rates from lenders.
You can also negotiate all kinds of interest rates and terms if you’ve narrowed down your lender options, lower your APR by paying a higher down payment, or improve your credit score before applying for a loan.
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How to improve your APR
The best way to improve your APR takes time and discipline. If your credit rating translates into a higher APR on a car loan, consider building a history of paying your bills on time and reducing some or all of your outstanding debt.
Once you’ve built a track record of consistent, timely payments on debt like credit cards, rent or mortgage, and public utilities, you’ll likely see an improvement in your credit score. This results in lower, cheaper APRs – which can save you money.
Because APR and fees vary from lender to lender, it’s important to shop around and compare offers before committing to a loan. Do the due diligence in advance and find the lender that best suits your financing needs to get a loan and car that is best for you.