While new and exciting cars are hitting the market every day, showing up in dealerships and online sites, some people might be worried they won't qualify for a auto loan. However, since the credit crunch following the 2008-2009 financial crisis, lenders have begun to ease up and are starting to make obtaining a car loan much easier.
The Federal Reserve Bank of New York recently released new data indicating the rejection rate for auto loans fell to 3.3 percent over the past 12 months. This rate was at 10.3 percent in October 2013. This signals a greater willingness on the part of banks to extend more auto loans for those individuals seeking one. According to Bank of America Merrill Lynch, car-loan bonds rose 4 percent year over year and totaled $61 billion through the first half of 2015, BloombergBusiness reported.
With banks and lenders showing a great eagerness to extend loans to car buyers, here are four helpful tips on how to get the best deal on a car loan:
1. Check your credit report
Your credit score is one of the biggest factors that banks and lenders use to determine your ability to repay the car loan. There are three major credit reporting agencies that provide these reports. In addition, the federal government has also established a site to help in this process. Before applying for an auto loan, check out your credit report to ensure all the data in it is accurate. Any mistakes or errors can negatively impact how lenders view your credit history, and can lead to a higher interest rate, meaning you'll end paying more money in the long view. Worse yet, a bad credit report can derail your auto-loan application completely.
2. Shop for the loan before the car
Before you even begin shopping around for your new vehicle, start the loan application process with potential lenders. According to Bankrate, many of the smaller online banks and credit unions did not get hurt as badly in the financial crisis. Because of this, credit unions typically offer rates 1 percent to 1.5 percent lower than traditional banks or dealerships. Shop around at these various institutions to see which ones will give you the best rate. Once you have been prequalified for a loan, you can essentially walk into the dealer with a blank check. This prequalification can even potentially help you get a better financing agreement with the dealer.
3. Get the shortest loan you can
As the price of car loans continue to increase, consumers might be tempted to purchase longer loans. While the longer terms will reduce the monthly payment, it can also potentially drive up the overall cost of the car, since longer loans typically have higher interest rates. You'll end up paying more for the vehicle per month, but over time, you'll save money in the long term. Consumer Reports suggested obtaining a 48-month loan, which is the optimum length of a car loan.
4. Read all the paperwork
Don't sign the contract on the spot. Take it home and read the entire document before you sign anything. Any loan application you sign is a legal document you are bound to fulfill. Since most of these last years, you need to know everything you will be responsible for during the financing period. Be wary of contracts with clauses that can end up penalizing you for paying off the loan before the completion date or that include variable interest rates.
Once you get the best financing option available, shop around for the lowest quotes on your auto insurance at CoverHound.