It’s not the zombie at your door that’s sending chills up your spine. It’s your auto loan payment. As dusk settles on your neighborhood, a shrill wail shatters the evening’s peace. Goosebumps rise along your arms as you hurry your way inside, closing and locking your door behind you.…
How do you know which loan offer is the best?
If you’re like most people, your car is a significant part of your daily routine and your budget. Whether you’re purchasing a new car, used SUV, or want to refinance a vehicle you already have, you need to know how to compare car loans and refinancing offers to find the best loan rates.
You also need to know how you can protect the investment in your vehicle. Dealerships and salespeople will try to “upsell” you on contracts and warranties. While some of these can be valuable, the best ones for you will depend on your driving habits and financial goals
There are thousands of auto lenders in the United States, which means it can be hard to narrow down the right lenders and the best auto loan rates for your situation. Review this guide on how to compare car loans and other tools available to purchase.
What You Need to Know About Car Loans and Refinancing Offers
Car loans come in a variety of shapes and sizes. Just like everyone has unique vehicle needs, financing offers are different from person to person and lender to lender. However, there are ways you can compare your loan options to find the best rates.
Before you start car shopping, you need to know what kind of loan options you have. That will depend on your credit history and whether you want a new car or a used one:
- New car loans: If you want a car that was manufactured in the last year or so, you’ll need a new car loan. Your credit and loan amount will determine your interest rates. The lender will also consider your income to calculate the loan amount you can afford.
- Used car loans: For a less expensive option, you can purchase a used vehicle with a loan from most financial institutions. You might have higher interest rates but fewer credit restrictions with certain types of lenders. You might or might not have to pay a down payment depending on your credit.
- Auto loan refinancing: You can refinance your current vehicle if you want to find lower interest rates or monthly payments. There are generally more guidelines for refinancing a car, and not every lender offers refinancing options. This could also lead to negative equity if you extend the loan term too far.
- Subprime car loans: People that have poor credit might only qualify for loans with some of the highest interest rates and fees, also called subprime loans. Even if you have bad credit, you’ll still need to compare subprime loan offers to find the best rates and features.
- “Buy here, pay here” car loans: Unlike other loan options, most “buy here, pay here” loans are in-house loans made by the dealership. This means you might not be able to apply or prequalify online. They also charge the highest rates and fees and will likely require a significant down payment.
Most lenders can give you a general idea of their interest rates before you apply, and you can use auto loan calculators to estimate your monthly payments. However, you’ll need to apply for loans to find out exactly what your costs will be.
Already have the cash? Depending on the kind of return you can get on your savings or investment accounts, as well as your credit history, you might be able to make money by taking out a car loan with interest rates lower than the rates on your investments. This means a loan still might be right for you.
How to Compare Car Loans: 4 Steps for You to Follow
To make the most of your car loan or refinancing offers, apply for multiple quotes within a 14-day period — also known as rate shopping — to limit the impact to your credit score. Review these steps first, get the value of your vehicle, then start your loan research.
1. Check your credit report and score before you apply.
If you want to qualify for the best car loan and refinancing offers, your credit needs to be in good shape. Fortunately, you can check your credit for free. While that does vary a bit, there are some general guidelines to credit profiles and scores from major credit bureaus and scoring companies. FICO score profiles, for example, follow these credit ranges:
- Exceptional: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Very Poor: 300-570
You can improve your credit score with on-time payments, paying down outstanding balances, and limiting credit inquiries. Doing so will help you get lower rates if you want to refinance your car loan in the future.
2. Get quotes from lenders with the best auto loan rates.
With 14 days to do your rate shopping, you’ll want to apply for credit with the best lenders first. Start with the lowest interest rates and look for lenders that have additional features, like loan add-ons. Experian’s Q3 2019 State of the Auto Finance Market report highlights how new and used auto loan rates vary by your credit profile.
|Credit Tier||New Car Loans Avg. Interest Rate||Used Car Loans Avg. Interest Rate|
(781 – 850)
(661 – 780)
(601 – 660)
(501 – 600)
(300 – 500)
You’ll notice that as you get closer to subprime auto loans, the difference between new and used car loan interest rates becomes more significant. This means higher monthly payments on used cars.
3. Use a spreadsheet to compare car loan costs and features.
While it can be tempting to take the first offer — or the lowest offer, you might find another lender has features that save you time or give you longer loan terms. You should know what your loan goals are. If you want to know how to compare car loans, you’ll need to know what’s in a purchase contract:
- The interest rate and APR
- Length of the loan
- Documentation fees
- Additional loan costs
- Convenience features
A spreadsheet or chart can help you rank the lenders in order of importance. You’ll want a longer loan term for a lower monthly payment and lower interest rates for a lower total loan cost.
4. Apply for the loans with the best auto rates.
You should be able to put together a comprehensive cost comparison chart before you apply for any loan or refinancing offers. While it won’t give you the exact cost of your loan, you can get a general idea of the loan costs for each lender. Reserve credit applications for lenders with these top traits:
- Competitive interest rates and fees
- Convenient features and benefits
- Reasonable rescheduling options
- Easy access to payment and balance information
- Flexible contact and support choices
If you plan to pay off your loan early, you’ll want to look for options that don’t have prepayment penalties.
Additional Features You Can Add to Your Car Loan or Refinance
Purchasing a car — new or used — is a significant investment. Most people underestimate the true cost of owning a car, so they forgo critical tools like loan add-ons and services that can save money in certain circumstances.
You likely won’t need all of the service options that a salesperson offers to you, but some of them reduce your vehicle maintenance costs while others can mean the difference between ruining your credit or not.
If you want to protect your investment, consider adding features like:
- GAP waivers: If your car is totaled and you’re upside down on your loan, you may be left with a remaining loan balance to pay. With a GAP waiver, the difference between your vehicle’s value and your loan balance is waived, and you no longer owe the debt.
- Job loss protection: Though not every lender or dealership offers this option, you might be able to purchase loan protection that pays your balance if you lose your job. This can be a crucial feature for people who work in unstable industries.
- Vehicle service contracts: It can be expensive to maintain your vehicle, and unexpected costs can throw a “wrench” in your budget. A vehicle service contract helps you cover the cost of these repairs without a deductible while including several key features like towing and rental reimbursement.
While each of these will add to the cost of your loan, they add peace of mind and financial protection. You can’t plan for accidents and repairs, but you can plan for how you’ll pay for them.
How to Find the Best Auto Loan Rates
Now that you know how to compare car loans and refinancing offers, you’re ready to look for the best auto loan rates for your situation. If you already have a relationship with your bank or credit union, you can start there. They might be able to offer the most competitive rates.
If you want to find refinancing offers, you can find several options online that might serve your needs. 😉