How To Reduce Auto Loan Interest Rates
Besides buying a property, buying a car is one of the most expensive transactions most Australians will ever do.
Home loans are the usual route people take to finance their dream home. The same goes for cars; it’s very common to take out a car loan to get your hands on the new set of wheels you’ve been dreaming of.
And we know Australians love a good deal. Every day they scour car sales websites for a better deal. No matter what is for sale, there is usually some haggling and negotiation to get the best value for every dollar.
But a lot of people don’t realize that there are ways to get a better deal on their car loan by getting a lower interest rate.
When it comes to buying a new vehicle, the interest rate on your car loan can make the biggest difference in overall costs and potential savings. A lower interest rate on your auto loan can help you save money in the long run and lower your monthly payments.
1. Improve your credit score
Your credit score is a big factor that affects the interest rate on your car loan.
The average comparison rate on auto loans can be as low as 5 percent up to 17 percent.
If you have a good credit rating, you can potentially get the lowest possible interest rate. With a lower interest rate, you will also have a lower car loan repayment.
But what if you have bad credit? Unfortunately, a bad credit report is a red flag for lenders. If you are successful in getting an approval stamp for a car loan, you will be affected by higher interest rates charged to mitigate the risk of lending money to a “delinquent” borrower.
If you are having trouble with your credit rating and don’t need to buy a car now, consider waiting until your financial situation improves and your credit rating increases accordingly. Even a slightly lowered interest rate can save you a lot of money over the life of the loan.
To improve your credit rating, pay your bills on time, avoid loan applications, keep your credit card balances low, and pay off your debts (personal loans, mortgages, etc.). Demonstrating good financial habits and financial stability to financial institutions can help prove to them that you are not a risky borrower and that you can repay the loan.
If you’re not sure if your credit score can help you get a lower interest rate, read our article on what is considered a great score and why it is important to have a good credit score.
Do you have a bad credit rating and urgently need a car? If your credit score is bad and not improving, this is not an option. Applying for a car loan with bad credit remains possible.
2. Buy a new car
For most people, buying a cheaper used car can seem like the best way to save money. While this may save you money in the short term, you may be surprised to learn that newer cars are often offered at significantly lower and competitive rates compared to older ones.
why is this the case? This is because a newer car should retain its resale value much better than a used vehicle.
While you may need to save for longer or have a longer repayment period, in the long run, thanks to a lower interest rate, more of your money will go directly to paying for the car itself.
3. Don’t stop shopping at the dealership
Working with a car dealership can be a convenient option. After all, dealer financing can allow you to sort through all the new cars and documents you need in one place – at the dealership.
But this convenience comes at a price. A car dealership is considered an intermediary when it sells a car to you. And as we know, intermediaries are always paid for their problems and in this case, that person is probably you.
A major downside is that dealers do not have access to a wide range of loans or lending features. This lack of accessibility to the best deals may mean that you will have to pay a higher amount.
In addition, dealer financing does not always have flexible terms. So, for example, if you prepay your loan, you could be hit with a large amount of loan exit fees.
You can get a finance quote from a car dealership, but it is advisable not to sign on the dotted line at the dealership because you could end up paying too much for your loan. If you didn’t settle for the first car you saw and kept looking for the best car, you should do the same for your loan.
4. Refinance your car loan
Car owners who wish to reduce their monthly repayments can choose to refinance their existing car loan to one that offers a lower interest rate, lower fees, or different loan terms.
Before you refinance your auto loan, there is little to consider.
First, make sure your loan costs will be lower than your previous loan. You shouldn’t just focus on interest rates. Check any other rates that may apply, such as early exit fees that you might be charged if you prematurely exit your old loan.
Next, make sure that you won’t pay more interest over the life of the loan. Keep in mind that while a longer loan term may lower your monthly payments, it may also mean a higher amount of interest in the long run, even if your interest rate doesn’t change.
Most importantly, make sure the new loan has the features you want. This could be the added flexibility to make additional repayments without penalty, or any other feature that can help you pay off your loan faster.
5. Use a novation lease
If you are planning to buy a car that will be partially or fully used for business purposes, you may be able to get a lower interest rate by applying for a novation lease.
A novation lease is a tripartite agreement almost exclusively used in Australia that you enter into with your employer and a lender.
Under this agreement, your employer assumes the auto loan debt on your behalf. You will then repay the loan amount to your employer through a “forgone pay” agreement from your pre-tax salary.
But keep in mind that there are pros and cons to a novation lease. A major benefit is the ability to get a lower rate, as your lender may view your employer as more financially stable than you.
Unfortunately, many employers don’t offer novation leases, and lenders usually require that you find one before you can use this type of lease.