Best Interest Rates: How to Get Them

To get the best possible interest rate on a car loan, it’s important to understand two things: the current marketplace for interest rates, including different lender options and financing offers, and your personal financial situation and its possible limitations. Though credit indeed became “tight” after the subprime-mortgage meltdown, as lenders swung from indiscriminate to overly conservative practices, car dealers say that misperception — more than a true financing shortage — has kept shoppers out of their stores. The situation has improved, especially as domestic manufacturers have ratcheted up incentive offers.

Several primary factors determine your interest rate:

• Your lender. Unless you borrow money privately, you’re going to be working with a bank, a credit union or an automaker’s financing arm. There are various pros and cons to each scenario.
• The car you’re buying. Are you buying a new car? A used car? A very used car? New-car rates are often the lowest.
• Loan-term length. When automakers introduced zero percent financing to keep cars selling after the Sept. 11 terrorist attacks, they were only offered on two- and three-year loans. Now, many automakers are offering zero percent financing on five-year loans. In general, though, longer loans come with higher interest rates.
• Your credit rating. Borrowers with better credit get lower rates. Jack Gillis, public affairs director for the Consumer Federation of America, estimates that only 15 percent of car buyers qualify for zero percent offers from automakers.

Lenders

Car buyers borrow money from three primary lending sources: banks, credit unions and automakers. Loans from any of these sources may come through the dealer, who often serves as the middleman and takes a cut in the process.

Getting a loan through a car dealer is not, however, automatically more expensive. In fact, dealers provide the only way to get specialized low rates from automakers.

“How can you beat zero percent?” said Daniel Ray, editor in chief of Bankrate.com.

“When a [car] dealer arranges financing, it earns some type of compensation, which can sometimes be passed on to the buyer,” said Fritz Elmendorf, vice president of communications for the Consumer Bankers Association. That may happen in the form of a lower price or a lower interest rate.

Car dealers borrow money at wholesale interest rates, which they then mark up and pass on to you. Because the dealer’s rate is lower, the rate you get may be no higher than one you arranged yourself.

Elmendorf agrees, but says there’s a caveat: “Consumers can get very competitive rates at the dealer, but [they] need to educate themselves to make sure that happens.”

CNW Marketing Research data shows that credit unions — another good lending option — account for only 11.7 percent of loan financing. According to Datatrac, a market research firm specializing in the financial services industry, credit union rates in 2009 were roughly 1.2 percent lower over the course of the year than bank rates on 48-month loans for both new and used-cars.

Credit Union Option

While credit unions provide less than 20 percent of total auto loans, they often offer good rates for consumers. Below are the average interest rates offered for 48-month new and used auto loans during 2009.

Like credit unions, lots of banks will lend you money. For a further comparison of bank and credit union rates, check the websites of Bank Rate Monitor, E-Loan, LendingTree or the Credit Union National Association.

New or Used?

In general, new-car loan rates are better than used-car rates. Usually, only new cars qualify for zero percent financing, though some automakers occasionally push certified pre-owned stock with zero percent offers. In general, the older the car, the higher the rate.

Term Length

Sign up for the shortest term length you can afford to take advantage of low rates.

According to Power Information Network, as of 2009 the average term for a new-car loan was nearly 64 months. This leaves consumers vulnerable to owing more on a loan than their car is worth, Gillis said, a condition that’s often referred to as being upside-down, or underwater.

“Sign up for the shortest term you can afford,” Gillis said. “If you know what your credit score is and the interest rate you qualify for from an outside lender, it makes it difficult for an auto dealer to sign you up for a higher rate.”

What to Do if Rejected for a Loan

If at first you don’t succeed, don’t try, try again until you’ve determined why you were rejected and have taken steps to address it. Credit scores are the primary determinant of who gets approved for loans, and if you didn’t check your credit score before you applied the first time, it behooves you to do so before applying again. Many loan applications automatically trigger a credit check, each of which can knock a few more points off your credit score, making what might have been a bad situation even worse. (See “Your Credit Rating” for more information.)

If your credit score is accurate and you’ve taken all possible steps to improve it, you’re ready to do what we recommend for all car buyers: Shop around for a good interest rate before returning to a dealership. Credit unions are a great option; while they’re perceived as exclusive, their interest rates are typically lower than a bank’s and they’re more likely to examine a subprime applicant’s circumstances and make exceptions if problematic credit history results from one-time medical expenses, unemployment or divorce.

Don’t overlook the bank at which you have a savings or checking account. Your financial history isn’t exactly a mystery to any potential lender, but an existing relationship can work in your favor, as it’s easier for a bank to sell services to its customers than it is to attract new ones off the street.

Finally, don’t rule out financing a car at the dealership. Only a dealer can offer new-car finance rates from the automaker; those rates are sometimes the lowest available. Also, if you’ve taken our advice but had little success with other loan sources, a dealership might be more willing to make financing accommodations if you’re buying one of its cars, especially a used one. If the dealership that denied you the first time was smaller, a larger one might have more tolerance for risk or have relationships with more lenders.