Lowering the interest rate on your car loan can save you several hundred to a few thousand dollars, so it definitely makes sense to do so if it is an option. If you are currently stuck with a car loan that has a high interest rate, here are some steps you can take to improve you situation and get a lower interest rate.
Look over your credit report.
Some people think that identity theft is what happens when someone takes your credit card and uses it illicitly. However, this type of theft is usually very easy to clean up, as the card company will usually reverse the charges for you, and it does not affect your credit score. But what if someone opens a line of credit (like a new card or a loan) without your knowledge? The only way to find out if this has happened is to review your credit report. The three big credit reporting companies, Experian, Equifax, and TransUnion, will permit you to download your credit report once a year for free. While it will not include your FICO score, you will be able to see your entire credit history. Read over the report carefully and make sure there is nothing on it that you don't recognize. You should usually review your report with at least two of the three bureaus, as items are not always reported to all three. If there is anything that you believe is in error, contact the credit reporting bureau to find out what can be done to remove it.
Pay your bills on time.
Your credit score is determined by a number of factors, but the biggest one is your history in how often your bills are paid on time. If you've missed a payment or two, this can have a significant impact on your credit score. Without a doubt one of the easiest ways to improve your credit score is to establish a history of on time payments to your creditors. This includes rent or mortgage, utilities, and outstanding credit cards. The longer you pay your bills on time, the more your score will improve.
Responsible borrowers have the power to improve their credit score significantly. This can mean that you'll be able to negotiate a lower interest rate on your car loan, which would give you more money to use elsewhere in your budget.
"I have a car loan with 3% interest!" "That's nothing, I have a car loan with ZERO interest!" If you have ever heard others brag about their super-loan car loan interest rates, you might wonder where how they got so lucky. The truth is, the car loan interest rate by itself means nothing. Here are some reasons why some people get better car loan interest rates than others.
1) Better Credit
Make no mistake about it, in most cases having great credit can mean you will get a lower interest rate. Those with great credit have shown that they are worthy credit risks, and are accordingly rewarded with lower car loan rates. Those with bad credit will have higher rates in order to make the loan more profitable. The lender views bad credit as higher risk, therefore to offset the risk they will raise the interest rate. This way if the buyer defaults on the loan, the lender can still make some money.
2) New Cars vs. Used Cars
Another factor to consider is whether the individual is buying a new car or a used car. If they are buying a new car, there's an increased likelihood of getting an outstanding interest rate, even with so-so credit. This is because the financing for a new car can come directly from the car manufacturer, and as such they have the flexibility to offer zero interest, because they are still making a profit off of the car. Keep in mind that if you elect to go with a zero interest car loan at the dealer, it's very likely that you'll end up paying the sticker price on your new car or close to it; there is very little wiggle room on the price when you opt for a zero interest car loan.
3) The Source of the Loan
If you think all loans are equal, think again! Interest rates can vary greatly among lenders, so be sure to shop around to find out who can give you the best rate.
Bottom line, while a low interest car loan is usually a good thing, you need to look at the whole picture, such as the length of the loan, the type of car (new or used), and where that loan originated from. Knowing these factors will allow you to determine whether you truly got a good deal on your car loan.