When you head out to shop for a car, you might find yourself so bombarded with information that it’s challenging to know what kind of deal you’re getting. Harder still is trying to compare different loans with different conditions to see if you’re getting a good APR.
We want to make this process simple for you, so we’ve laid out the best way to approach shopping for a car loan. Learn the lingo, familiarize yourself with different financial institutions, and prepare to shop with these helpful tips.
Learning the lingo to get a good APR
There are a few terms you’ll frequently hear when shopping for a car loan, including the following:
- APR: APR is the annual percentage rate on a car loan. This percentage rate encompasses all fees and interest you will pay per year to borrow money.
- Interest rate: The interest rate alone is just the percent (in interest) that you’ll pay each year. It does not include the additional fees and expenses you pay for borrowing money. When comparing loans, be sure to check the APR since that is the full cost of the loan.
- Term: The term is the length of time you will have the loan, from start to finish. In other words, the term is how long it will take to pay back the money you borrowed.
- Lien: A lien refers to the fact that until you pay off your car loan, the financial institution that lent you the money will own the title.
Understanding APR vs. Interest Rate
Before you start shopping, it is important to understand the difference between these two terms and how they work together – especially when shopping at the dealership.
If you are financing through a dealer and offered a loan with 0% interest they still need to make money on the sale, so it’s important to pay attention to any additional fees, features or packages they are offering and understand if these costs will be rolled into your loan. An easy way to see if the dealer is adding fees or costs into your loan is to ask for the APR.
If your interest rate is 0% but your APR is 4.84%, this means the dealer has included fees or costs into your loan. The higher the APR, the more fees or costs have been included.
Factors that affect APR
Not all loans are equal. Your APR will vary depending on your credit score, the term of the loan you’re applying for, the amount of the loan, and whether you’re purchasing a new or used car.
Credit score and credit history
Your credit score is one of the most essential factors in determining the APR you qualify for. A recent article by US News and World Reports outlined the average APR that car buyers can expect to find based on their credit score.
In addition to these ranges, if you have excellent credit, you might be able to qualify for 0% interest from dealerships, but that doesn’t mean your APR is also 0%.
With a shorter term, you might find that lenders offer higher APR and interest rates. However, you’ll likely still save money over the life of the loan, even with a slightly higher APR. This happens because the longer you have the loan, the more interest you will accrue and pay. Shorter terms reduce the total cost of borrowing the money.
In some cases, the more money you take out to pay for your car, the higher the interest rate will be. It can often help to save up for a larger down payment so you don’t have to borrow as much. The smaller the down payment, the more lenders might see you as a liability.
New vs. used cars
Used car loans often come with higher APRs than new car loans simply because used cars are more likely to break down or be totaled. This risk represents a liability for lenders, so you’ll likely see a slightly higher APR. This difference is usually less than a percentage point, though.
Depending on where you shop for a car loan, you might be able to get different deals on the APR. For example, credit unions can often offer lower APRs because of their non-profit status and many don’t charge additional fees to borrowers. And as credit unions exist to serve their members, they are typically more willing to work with borrowers with lower credit to get them a better APR. On the other hand, loans from banks often require stellar credit to get the best rates.
Car loans from a dealership can be a good deal. However, be wary of promotions and always be sure to know the APR and interest rate you can qualify for elsewhere. Better yet, get preapproved for your loan before heading to the dealership.
Shopping for the best APR
Now that you know what to look out for, where do you begin to shop? The best course of action involves consulting a range of financial institution types, both online and in-person, if possible. Keep a spreadsheet for reference as you shop around to keep track of the differences between each loan you find.
It’s also a good idea to talk to a financial advisor at your bank or credit union. These customer service representatives can help you determine the ballpark APR you should be shopping for, given your credit score and history.
Once you’ve searched around and have a list of loans, narrow your choices down to two or three to apply to for preapproval. To do this, you can use a car loan calculator to compare the total costs and monthly payments.
Preapproval lets you know that you can expect to be approved if you decide to apply for the loan. Preapprovals can serve as bargaining power when you head to the dealership. They can also keep you on track with your budget.
To start shopping for your loan, check out the low, competitive rates that Jeanne D’Arc Credit Union offers.