The Federal Reserve recently announced an interest rate increase, which could impact car shoppers – especially those with bad credit. However, your hopes of an upgrade to your car aren’t out of reach. Instead, you will need to think outside of the box.
Bad credit auto loan rates are typically higher than traditional loans, and an interest rate increase could mean higher monthly payments for borrowers. However, it’s important to remember that the Fed rate increase is just one factor in setting auto loan rates. When determining loan terms, lenders also consider factors such as the borrower’s credit score and income.
Finding the Best Interest Rates
For car shoppers worried about the impact of the interest rate increase, the steps for finding the right loan for your needs remain the same.
Shop Around and Compare Rates
Shopping around for the best loan deal is essential. Many lenders specialize in bad credit auto loans, each with its process for setting rates. By shopping around and getting multiple quotes, borrowers can be sure they’re getting the best deal possible on their loan.
Identify What’s Bringing Down Your Credit Score
For some borrowers, a low credit score is the main obstacle to getting a reasonable interest rate. Identify what’s bringing down your score and work on fixing those issues. Common problems include late payments, high balances, and too many inquiries.
Get Pre-Approved for a Loan
You may have heard that getting pre-approved for an auto loan is a good idea before heading to the dealership. And it’s true – getting pre-approval can give you a better idea of what interest rates and loan terms you can expect. That way, you’re not caught off-guard by a high-interest rate at the dealership. Not sure how to get started? We’ve got you covered. Here’s everything you need to know about getting pre-approved for an auto loan.
When you get pre-approved for an auto loan, a lender will give you an idea of how much money you can borrow – and at what interest rate. This can be helpful in two ways. First, it can help you narrow your car search to only those models that fall within your budget. And second, it can give you negotiating power at the dealership, as you’ll know what interest rates other lenders offer.
Once approved, you’ll receive a letter stating the maximum amount you can borrow and the interest rate you qualify for. Remember that just because you’re approved for a certain amount doesn’t mean you have to borrow that much – the maximum amount the lender is willing to lend based on your information.
Consider Buying Used
One way to get a lower interest rate is to buy a used car instead of a new one. Used vehicles typically have lower loan rates than new cars. Because used cars are not worth as much as new ones, they also cost less, and you don’t need to worry about depreciation turning your loan upside-down.
If you’re looking for an affordable way to finance your next car, consider a used car instead of a new one. You may be able to get a lower interest rate and avoid the expensive price tag of a new vehicle.
Save up a Sizable Down Payment or Offer a Trade-in
When you’re applying for a loan to buy a car, the size of your down payment will be one of the factors that lenders consider. A larger down payment indicates to lenders that you’re a low-risk borrower, and they may be more likely to offer you a lower interest rate.
You can also offset some of the cost of the loan by offering a trade-in vehicle. If you have a trade-in, get an estimate of its value before you start negotiating with dealers. That way, you’ll know how much equity you have in the car and how much money you’ll need to finance it.
Keep Your Loan Term Short
If you’re considering taking out a loan, it’s essential to understand how loan terms can affect your overall costs. The loan term is the length of time you have to repay the loan, and it can range from a few months to several years. Generally speaking, the longer the loan term, the lower your monthly payments will be.
However, you’ll also accrue more interest over the loan if you have a longer term. So if you can afford it, opt for a shorter period to save money on interest in the long run. Of course, every situation is different, so talk to a financial advisor to see what option makes the most sense for you.
Make Extra Payments When You Can
Making extra payments on your auto loan can help you pay off the loan faster and save on interest. If you get a windfall or have extra money for one month, consider making a larger payment to reduce the principal balance. Even rounding up your payment a few dollars each month will chip away at your principal faster than just paying the minimum.
Focus Forward
By following these tips, car shoppers can be sure they’re getting the best possible deal on their auto loan – no matter the interest rate. Remember to budget the secondary costs of owning a car, such as your insurance and fuel. Soon enough, you’ll be planning your next family vacation and dreaming of big adventures instead of fretting over interest rates.
