How to get the best interest for a car purchase despite low

If you've ever financed the purchase of a vehicle or refrigerator, you know that your credit score is important to getting a good deal.

With a good credit score, you can get a lower interest rate. But if you have a low score or if you don't have a credit history, you are relegated to the high risk category. That implies a higher risk for the lender, so you have to pay more, thus adding significant financial costs in addition to the purchase price. 

Between a fifth and a quarter of all auto loans are in the high-risk category, according to analysts at TrueCar, a major online auto marketplace that is associated with Consumer Reports. That represents more than 5 million auto loans per year.

But your credit score might not be the only factor driving up your car loan interest rate. If you finance your purchase through a car dealer, using a loan option that they negotiate instead of using a bank or credit union, the rate is usually higher because the dealer receives a commission for acting as an intermediary.

Also, according to a recent study , auto loan interest rates for black or Hispanic consumers may be higher due to bias and poor government oversight.

But there are ways to keep the interest rate on your auto loan as low as possible. Although Consumer Reports and other auto loan experts recommend improving your credit rating before applying for a loan, real-life circumstances don't always allow enough time to do so. 

Perhaps the best way to get lower interest is to see what your bank or credit union offers rather than the car dealer.

"Before you go to the dealership, check out other options and compare interest rates to see what's available based on your credit and income," explains Chuck Bell, director of programs for CR's division of consumer advocacy.

"Many lenders will give you a direct loan, so you don't have to go to the dealer to get your financing, which is often more expensive," adds Bell. "You can borrow from banks or credit unions, and some lenders will pre-qualify you for the amount you're looking for with a flexible credit check, which won't affect your credit score."

In general, people with excellent credit will get the best interest rates. People with bad credit scores or no credit (those who haven't made credit card payments and other monthly bills recently) will pay the highest rates. Rates are increased for subprime loans because the borrower is more likely to default on the loan.  

"The score is designed to predict the borrower's risk of repaying the loan amount," says Alain Nana-Sinkam, vice president of strategic initiatives at TrueCar. "Analyze your history of payments on time for bills, credit cards and personal loans, for cars and housing, and use that information to predict your future behavior and therefore your risk of default."

A low credit rating means that you typically won't qualify for the attractive zero percent interest offers that are featured in new car ads, and that means you could pay hundreds or even thousands of dollars more in interest for the life of the loan.

According to Experian , one of the major credit reporting agencies, credit scores are broken down as follows:

  • Excellent: 800-850. This category includes 21% of borrowers and has the best interest rates.

  • Very Good: 740-799. A quarter of borrowers fall into this category, which promises better-than-average interest rates from lenders.

  • Good: 670-739.  This segment covers 21% of borrowers. Experian says that only 8% of this group are likely to become seriously delinquent on payments.

  • Acceptable: 580-669.  This category is considered high risk and includes 17% of borrowers.

  • Poor: 300-579.  Only 16% of borrowers are in the critical high risk category. This group is more likely to have additional fees or loan application declines.

"The sad reality is that if you are a high-risk buyer, you will pay more interest than someone with a good credit rating," says Matt DeLorenzo, editor of Kelley Blue Book.

How to save money

After discussions with experts in the loan industry, CR found that there are several ways to save money, even if you have a less than optimal credit rating.

  • Know your credit score. Experian recommends that you check your credit score at least once a year as a routine activity. That way, you will know where you are to manage expectations regarding loan requirements and what you need to do to increase your score. You should also look for errors on your credit report, which can affect your score, says Bell.

    "Luckily there are many sites online that you can visit to get a free credit score," says Nana-Sinkam. "All major credit bureaus offer a free credit report annually."

  • If there is time, improve your credit score.  A credit rating can be improved in a number of ways, mainly if you pay your bills on time. You always pay your credit card and other bills when they are due, even if it is only the minimum payment. Here's good advice for any loan: The more you pay up front, the less you'll pay in the long run.

  • Make a bigger down payment.  "Making a larger down payment reduces the amount of the loan you need, and a smaller loan means less interest," explains Amy Wang, associate director of Credit Karma Auto. "The down payment can be in cash, a trade-in vehicle, or a combination of both."

  • Get prequalified. Like knowing your credit score, having your bank prequalify you for a loan helps you manage expectations about what's possible.

Contact your financial institution and see what is available. Nana-Sinkam says that before getting prequalified, it is advisable to check your credit report for disputable charges. Everything helps and only a few corrections can get you a better interest rate. Getting approved for a loan before buying a car gives you the opportunity to negotiate.

"It involves having an interest rate that you can take to the dealer to see if they can beat it," says DeLorenzo. "Dealers can have access to programs that offer a better interest rate to high-risk borrowers."

  • Take into account what the manufacturer offers. If you're looking for a new vehicle, some manufacturers like Chrysler, Hyundai and Kia often have high-risk borrower programs, DeLorenzo says. You have to search their websites to see what they offer, and keep in mind that these types of offers will be available on the cheapest cars.

    "Most of the subprime loans you'll see are for the entry-level and inexpensive vehicles, the lower end of the product line," he adds. "I don't think any manufacturer wants a high-risk buyer to have an advantage over a high-end vehicle, such as a luxury car or truck."

  • Consider buying a used vehicle. In general, used cars cost less money, and the value of a used car is more likely to remain stable for longer than that of a new car, which will depreciate rapidly. That means that used car transactions pose less risk to the lender, and there is a greater chance that a high-risk borrower will get approved for a loan.

    "In our experience, most high-risk buyers shop the used car market because they are looking for lower-priced vehicles," says Wang.

  • If you think you are a victim of discrimination, report it. Racial discrimination in auto loans is nothing new. Following a discrimination lawsuit , Ally Financial, which services loans from several automakers, settled a racial discrimination lawsuit for $ 80 million just a few years ago.

According to an academic report published in December, black and Hispanic borrowers were 1.5% less likely to be approved for a loan and paid 0.7% higher interest rates, regardless of their credit. The study found that although bank loans, which are regulated by the federal government, were less likely to be discriminatory, more than 80,000 black and Hispanic borrowers were denied loans for which they would have been approved if they had been individuals. White race.

Loans offered by dealers are known as indirect loans, because the dealer arranges the financing through an outside company. But it is not necessary for the dealer to share loan offers from the lender with the borrower. This is how for-profit loans are scaled up, and as last year's study indicates, this is how dealers were able to charge minority borrowers more. A federal rule enacted in 2013 placed auto loans under the tutelage of the Consumer Financial Protection Bureau (CFPB) and reduced discriminatory auto loans by 60%.

“Unlike mortgage lenders, who report each application through the Home Mortgage Disclosure Act, auto lenders do not consistently report application or loan-level data. lending, making it difficult for regulators to monitor lenders for discriminatory practices, "says Erik Mayer, one of the study's authors. Southwest areas. Our estimates of auto loan discrimination are strongly related to statewide measures that show the prevalence of racial bias. "


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