Money Talks, So Should You

5 tips for getting the best deal on car loans

Here's a look at how to make the most of historically low car-loan rates.

Jerry Kronenberg
by Jerry Kronenberg

The Federal Reserve's moves to drive down mortgage rates have produced a great side effect for U.S. consumers — record-low rates on car loans, too.

"Auto-loan rates are the lowest we've ever seen," says Greg McBride of market watcher Bankrate.com, which found that five-year new-car loans averaged 4.1% nationwide late last month. That's way below their long-term average of 7.5%.

McBride attributes today's attractive rates mostly to the Fed's quantitative-easing efforts, in which the central bank has bought up billions of dollars of U.S. Treasury bonds and mortgage-backed securities.

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Fed members are trying primarily to push mortgage rates down and boost the U.S. housing sector, but their initiative has reduced auto-loan rates even more sharply. Some car loans charge less than 2.5% annual interest these days, well below the current 3.7% average for 30-year fixed-rate mortgages.

McBride says car loans are cheaper than mortgages because it's a lot easier to repossess a vehicle than foreclose on a home.

"If you miss more than one car payment, your vehicle won't be in the driveway in the morning," he says.

Here are five tips from McBride on how to get the best deals on car loans.

Check your credit
Start you car-shopping efforts by verifying the accuracy of information that credit bureaus Experian, Equifax and TransUnion maintain on you.

Any errors can disqualify you from the best loans, so go to the industry's AnnualCreditReport.com site and get the free copy of your credit reports that federal law entities you to once a year.

If you find mistakes, file a dispute with Experian, Equifax or TransUnion.

Qualify for the best rates
McBride says the lowest loan rates go to people who put at least 10% down on new cars or 20% down for used cars. You also need around a 700 "FICO score," a credit score calculated using software from a firm called Fair Isaac.

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Fortunately, a 700 FICO score isn't actually that hard to get — in fact, it's slightly below the U.S. median of 711.

That said, checking your score is a bit involved because government-mandated free credit reports won't include it. You can either apply for a loan and ask the lender to tell your score or buy access to it yourself for around $20 from Equifax.com or MyFico.com.

If you don't have a good enough score or down payment, consider holding off on a car purchase until your finances improve.

Line up a loan in advance
Getting pre-approved for a loan through a bank or credit union will maximize your leverage with dealers, who will typically offer you financing themselves.

Without pre-approval, a dealer might offer you a loan only if you agree to buy a specific car or accept a longer repayment term than you want.

Conversely, come in with a loan already lined up and the dealer might beat the offer you already have.

Shop for the best rates
Large banks such as CapitalOne have made a big push into online car loans, while local banks and credit unions want your business as well.

So McBride recommends checking with several lenders to find the best deals. His site features a search engine that updates hundreds of car-loan rates daily.


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Don't get more than a five-year loan
Lenders and dealers typically offer car loans with terms as long as seven years, but McBride recommends skipping anything longer than 60 months.

"If you can't afford the payments on a five-year loan, you need to find a less-expensive car," he says.