It’s been a rough couple of years for car buyers. Just as we’re all starting to recover from the pandemic parts shortages, we end up with one of the auto industry’s biggest strikes in recent memory. And that’s not even taking into account all of the usual ups and downs of the economy. So, how is anyone supposed to get a car loan with a low APR?
Don’t worry too much just yet, because you have more control than you might think.
Build Your Credit
Maintaining a decent credit score is one of the most important things you can do to find auto loans with low interest rates. Unfortunately, there’s really no way around it, but it’s easier to improve your credit than you might think. Plus, you don’t need perfect credit to get a good rate.
FICO credit scores fall between 300 at the low end and 850 at the high end. Generally speaking, here’s the breakdown of the five different tiers of credit:
300 to 579 | Poor |
580 to 669 | Fair |
670 to 739 | Good |
740 to 799 | Very good |
800 to 850 | Exceptional |
Most experts say that 670 is the magic number to get approved at a decent rate, but it won’t necessarily get you the best rate. Getting your numbers into the “Very Good” or even “Exceptional” range is your safest bet.
Experts say that people with lower scores are more likely to see large credit score increases if they take a few key actions.
Firstly, you should always be sure you’re making your minimum payments on time. Payment history determines 35% of your FICO score, making it the most influential factor by a long shot. Setting up automatic payments can go a long way to ensuring that you don’t miss any.
Credit utilization is also a huge factor. Basically, this refers to how much of your credit you’re currently using, expressed as a percentage. For instance, if you have a card with a $1,000 limit and you owe $500, that’s 50% utilization. People with the highest scores tend to have single-digit utilization, so if you can prioritize paying your total debt down, it can boost your score very quickly.
There are quite a few other highly influential things you can do to quickly improve credit, especially if you don’t have a long or varied credit history, including:
- Becoming an authorized user on a trusted person’s line of credit
- Asking for higher limits on current lines of credit
- Taking care of accounts in collections
- Applying for a credit-builder loan
- Disputing credit reporting errors
Pick the Right Kind of Car
Once you’ve got a handle on the old credit score, it’s time to set a budget so you know exactly what you can handle on a monthly basis. Once you have a budget in mind, you’ll be able to pick the type of car that fits best.
Now, let’s talk about the pros and cons of buying new vs. used—either one can be better, depending on your circumstances. Buying a pre-owned vehicle can be beneficial because used cars are cheaper, so you won’t have to borrow as much money to finance it. However, used car loan interest rates tend to be higher than new cars because they’re seen as less safe investments for lenders. When picking the right one for you, it’s essential to weigh these two things against one another.
According to Experian, in 2023, buyers with a 650 credit score got an average interest rate of 9.6% on a new car, and 14.1% on a used car. That’s a pretty big gap, but remember, that gap gets smaller for higher credit scores.
It’s also important to be picky about what you buy, if you have the luxury of doing so. Make a list of your “wants” and “must-haves.” Sure, it’d be nice to get the new high-grade model with the biggest infotainment screen and a heated steering wheel, but you can save thousands of dollars by shopping for a base model with a few years on it, which will likely have the same space and fuel economy as a brand-new car. If you’re spending less money on the price, you won’t have to borrow as much, and you’ll end up paying way less in interest over time, even if your APR is slightly higher.
Find the Best Deals
We already talked about the pros and cons of new and used cars, but don’t forget, there’s always a third option: leasing.
On paper, leasing may not seem like a great deal, because it’s basically a long-term rental. But, if you have good enough credit or enough cash down, it can make sense. Leases are always newer models, typically no more than a couple years old, and this all but guarantees they’re dependable. Lease payments are usually much lower than new car payments as well, because you’re not paying the entire value of the car, you’re just paying for its expected depreciation plus some interest. If your credit isn’t right where you want it to be to get the best interest rate, leasing can also be a good way to give your score an extra bump over time.
Still, for many, buying is the best choice. If you do decide to buy instead of lease, you can benefit greatly by waiting for low APR deals from the manufacturer. It works like this: automakers team up with their authorized dealers to offer low interest to shoppers at specific times. This benefits everyone, because the dealerships move inventory, and the customer walks away with a super low rate. Sometimes you can even finance a car for 0% APR. These sales often happen during holidays, but they can pop up any time of the year, so it’s crucial to pay attention to your local dealer’s specials.
Finally, when determining how long of a loan you want, it’s best to shop for the entire loan amount instead of the monthly payment. It’s easy to be enticed by a lowered payment, but if it comes with a 72- or 84-month term, you’ll end up paying far more interest over time. If you find that you can’t keep up with an average 4- or 5-year term, it might be best to rethink your budget and aim for something less expensive while you build your credit further, then buy your dream car a little later.
Find the Best Deals at Molle Volkswagen of Kansas City
If you’re finding yourself discouraged by high interest auto loans, don’t stress. Contact our finance department to learn how you can score the best APR, or value your trade on our website to receive an instant cash offer on a trade-in today. Happy shopping, KC!
