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What Buyers Should Know About Auto Loan Rates

Auto loan rates have risen strongly in recent years, creating more incentive for buyers to seek out competitive rates and terms from dealers, banks and credit unions. When it comes to buying a car, not all financing is created equal: In addition to large differences in the annual percentage rate (APR) for an auto loan, different financing products may take advantage of long repayment terms and/or other tricks of the trade to squeeze buyers for more money than they need to spend.

When buying a car, one of your top goals should be making sure you aren't at risk of going underwater with your loan. This refers to consumers who owe more on their auto loan than what their car is worth. Unfortunately, this is always a risk when buying a car, especially when purchasing a new vehicle. Here are five tips to help you avoid these common pitfalls and secure the best auto financing available.

1. Get your credit score as high as possible.

What Buyers Should Know About Auto Loan RatesBefore you apply for any kind of credit, it's worth checking your credit scores and credit reports to make sure your information is accurate. Contest any inaccuracies you find on your report, and take simple steps to improve your credit-worthiness by paying down credit card balances and reducing your debt-to-limit ratio. This will make you more attractive to lenders and possibly earn you a lower APR for your auto loan.

2. Put down at least 20 percent of the value of the car.

A down payment of at least 20% will go a long way toward keeping buyers safe from an underwater loan. In this scenario, even if you have to sell your car earlier than expected, you'll be able to earn enough from the sale to pay off your auto loan.

Buyers should keep in mind that when they purchase a new car, the value of that vehicle drops by 20 to 25%. By putting down a sizable down-payment, you can account for that potential loss in value and avoid a scenario where you're still making payments on a car you no longer own.

3. Don't be tempted by zero-down sales offers.

While buyers love zero-down sales because it reduces the cash they have to invest up-front when purchasing a vehicle, these sales offers can be a risky proposition. Since you're putting down no money as a down payment on your vehicle, the full cost of that vehicle is being financed, which puts you at risk of being underwater down the road.

If you purchase a new car with one of these zero-down offers, it could be years before you've reached a point where your auto loan isn't underwater. Even if you purchase a used car that doesn't depreciate in value as quickly, it could still take months of payments before the amount owed on your loan is less than the value of the car.

4. Don't settle for the first loan rate you see.

What Buyers Should Know About Auto Loan Rates 2Dealerships love to sell financing products to auto buyers, because it allows them to earn a profit on both ends: They make money from the vehicle's sale, as well as the interest paid over time. But before you sign on the dotted line, shop around to see what alternatives you can find from other financial institutions.

While auto dealerships will tempt buyers with a lot of promotional offers, your local bank or credit union might offer a lower APR and better terms for your loan. Don't be afraid to shop around and even use competitors' rates to try and negotiate a better deal.

5. Avoid loan repayment periods longer than 60 months.

When auto loan repayment lengths go beyond 60 months, interest rates tend to increase. Even if interest rates are flat, the longer length of the repayment period results in buyers paying more interest. Even the difference of a few additional months, combined with a higher interest rate, can increase the total amount paid by hundreds or thousands of dollars.1

Always agree to a monthly payment that fits your budget, but do your best to keep repayment periods at 60 months or less.

For many people, vehicles are a non-negotiable part of daily life. But when you're on the search for your next car, use these smart shopping tips to avoid predatory loans and make a good investment into your next vehicle.

Sources:

1. More About Loans 
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