By Liz Opsitnik | Jun 11, 2015 11:23 a.m.
You've spent hours searching through used car listings. trying to find the perfect new-to-you car. It has only had one owner, it has low miles and it's the exact color you want. It even has navigation and Bluetooth. Now you have to make sure you don't pay too much to finance it.
Before you apply for a car loan
Melinda Zabritski, senior director of automotive finance for Experian. says used car shoppers should do a few things before applying for an auto loan. "Be familiar with your credit report, be familiar with your credit scores and really understand your own situation credit-wise, as well as what you can afford," Zabritski says.
Recent data from Experian Automotive shows that the average amount consumers are financing for a used car loan is $18,213. The average credit score for used car buyers is 643 and these buyers are getting an average auto loan rate of 9.17 percent. Zabritski explains that shoppers with excellent credit (considered prime or super prime) can secure used car loan rates as low as 2 percent to about 5 or 6 percent, while on the other end of the spectrum, used auto loan rates can be as high as 22 to 23 percent for those with "very, very, very poor credit." She notes that Experian's auto loan rate data encompasses used car sales from franchise and independent dealers.
(Eric Hood/Getty Images)
What do auto lenders look for?
There are a few things lenders look at when they decide to approve or deny a loan, as well as what interest rate to charge. "Obviously your credit score is one of the elements," Zabritski says. "There are things specific to car loans and are going to be factors, such as your payment-to-income ratio, your overall debt-to-income ratio, as well as any kind of money down you'll be putting on the vehicle. They look at various ratios to make sure you can afford that monthly payment. Loan-to-value comes into play as well, where typically on any vehicle, the lower your loan value is to the vehicle, you'll typically get better interest rates." The loan-to-value ratio is the loan amount divided by the value/price of the vehicle. Zabritski says to lower your loan value, you should put some money down and pay taxes and fees up front.
Shop around for the best car loan terms
Just like you probably shopped around to find the right used car, you want to explore your auto finance options as well. Karl Brauer, senior analyst at Kelley Blue Book. says, "It's always smart to see what kind of financing you can get as a starting point, and then see if the dealer can meet or beat it."
As you shop around for car financing, Zabritski recommends you do all your car loan applications inside a two-week time period, which she says the credit bureaus
will count as one inquiry. If you do a few applications at once, then wait a couple months and apply again, it will likely count as multiple inquiries, which can lower your credit score, making it more likely you’ll have to pay a higher interest rate when you do get a loan.
Before applying for a car loan at the dealer, consider applying at banks and credit unions. Zabritski explains that these are considered direct lending. "You go directly to a lender and apply for credit, you get a check, bring it to the dealership and pay [for the car] that way," she says.
Brauer says that credit unions offer "surprisingly low interest rates on a used car." Looking at current three-year used auto loan rates offered by credit unions and banks in Indianapolis, Indiana on Bankrate.com. PenFed Credit Union has a rate of 1.99 percent. Chase Bank is offering 2.88 percent, PNC Bank 3.04 percent, Fifth Third Bank 3.68 percent and Huntington Bank 4.24 percent. Keep in mind though that you typically have to be a member of a credit union to obtain financing through them.
The other type of car financing is indirect lending, which Zabritski explains is a car dealership's network of lenders they work with to arrange financing for your car. She says that one advantage of applying through the dealer for your loan and their network of lenders is that dealers have access to many more lenders, some of which you might have never heard of. Because there are so many indirect lenders dealers work with, she says their rates are "highly competitive," and this means "you often have very low interest rates" as a result.
To get the best deal overall, Zabritski recommends that consumers should focus on the price of the used car. "The key is don't negotiate payment, negotiate the purchase price. Leave the financing out of it, negotiate the price [of the car], then tell them you've got your own financing arranged. Chances are, they'll say, 'If I can beat that rate, will you take my loan?' And of course let them beat it if they can."
Consider a CPO Vehicle
Many certified pre-owned vehicles are offered with manufacturer incentives, which can help you get the best interest rate on your used car loan. Current used car deals on CPO models feature interest rates from 0.9 to 2.9 percent. Sometimes, automakers will also offer payment credits or free maintenance on top of their CPO interest rate incentives.
CPO vehicles are typically late-model used cars that go through a rigorous inspection process at the dealer and often come with a warranty from the manufacturer.
As you shop for your used car financing and strive to find the best used car loan rate, Zabritski says to remember to "do the research, keep an open mind at the dealer and be educated about what you truly can afford."
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