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|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
How to Get Your Very Best Deal on an Auto Loan
After seven years of steady growth in sales and profits, the auto industry is now riding five straight months of declining sales. Declining car sales means rising inventories for dealers. What is turning out to be bad news for the auto industry may be great news for car buyers. Car dealers still need to hit their monthly quotas, making it more likely they will be ready to deal; and with auto loan rates still near their historical low, car buyers stand to save thousands of dollars on their next car purchase. To ensure you get the very best deal on your car loan, follow these key steps:
Know Your Credit Score
Your credit score is the primary measure lenders us to determine your creditworthiness and can vary by 20 points from one month to the next, which can mean the difference between getting a good loan rate and the very best rate available. The biggest scoring factor is your payment history. While there is not much you can do to change the past, it is vitally important to build a solid history going forward. Generally, the most recent two years of payment history are given more weight than prior years.
Your credit utilization ratio is the second biggest scoring factor. How much credit you are utilizing in relation to your available credit at any one time is a key measure in determining how you manage your credit. If your ratio is high, you might be deemed a higher risk for obtaining any new credit. A ratio over 30% will hurt your score; however, you can lower your score by paying down your balances – the lower, the better. As you work towards paying down your balances, allow for at least two months before applying for a loan because it takes awhile for the reporting agencies to catch up to your credit activities.
Finally, in the 12-month period leading up to applying for a car loan, refrain from opening, or trying to open, any new credit accounts. New credit inquiries can temporarily drop your score. To that point, if you apply to multiple lenders for a car loan, make sure it is done within a two-week period. That way they will be counted as one inquiry on your credit report.
Shop the Loan, Then the Car
When you walk onto a car lot with cash in hand you are dealing from a position of strength. Instead of worrying about how you are going to pay for the car, you can focus on striking your best deal. That’s why it is strongly recommended that you obtain your financing before shopping for your car. You should know your credit score before applying so you know what you can expect in terms of a loan rate. Most lenders will provide you with qualification guidelines before you apply so you can see what rate you could qualify for. If you feel the need to apply with more than one lender, just make sure you do so within a two-week period. If a car dealer is offering zero percent financing on a model you want, it might be worth considering, keeping in mind that less than 15% of borrowers are able to qualify.
Keep Your Eye on Total Costs
A mistake many car buyers make is to focus in on the annual percentage rate (APR) or the monthly payment amount instead of looking at the total cost of the loan. While a longer-term loan means lower payments, it will increase your interest costs. The difference between a three-year term and a five-year term could translate into paying several thousand dollars more in interest. A general rule-of-thumb is if you can’t afford the higher payment of a shorter term loan, you are probably buying more car than you can afford. You would be better off making a larger down payment or buying a less expensive model.
Get Everything in Writing
Don’t sign any loan papers until you are certain you understand the terms. Take the time you need to study it. Have someone review it before you sign. Look out for variable rates, conditional items and prepayment penalties.
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