One area where many people are stuck in vicious, undermining money circles is interest rates on financing. This includes mortgage, car loans, and credit cards. The more interest you pay, the more you remit to pay something off. For example, assume you finance a $15,000 car four years. Your Annual Percentage Rate, or APR, is 10 percent. To pay off your car, you’ll remit a total of $16,050, which means your $15,000 car cost you an additional $1,050. To avoid this financial pitfall, follow these five Investopedia tips to lower or omit the APR on a car loan.
1. Improve Your Credit Score
If you already have perfect credit you can ignore this suggestion; if you’ve been hit hard and your credit score reflects that, it’s time to begin the work to improve it. Interest rates are determined in part by your credit, and the lower your score the higher the APR. The reason why is simple: The financer is taking a higher risk to fund your purchase contract, so he or she expects you to pay more in the end. If you have less than a stellar report, take the steps to improve your credit score prior to shopping for a new vehicle or refinancing your existing one.
2. Refinance Your Existing Contract
When asked the question how to lower APR on a car loan, financial experts agree that consumers can refinance their vehicle loan. Per Investopedia, assume you have bad credit and financed $16,500 over five years. Your APR is 21 percent. By the time the car is paid off, you’ve paid $10,300 in interest. If you’ve been making your payments faithfully, you may be able to refinance the balance of your car loan and your current APR. If you secure a much lower rate, such as 7 percent, you’d reduce what you pay in interest by nearly $7,000, and you can use that extra money to pay off the car sooner.
3. Avoid the Middleman
When you finance your vehicle through the dealership, you are paying for an intermediary. Do not go car shopping without your financing already in order, unless the dealer is offering zero percent financing and you have the credit to secure it. Otherwise, chances are you will pay a higher APR if you finance your vehicle through the dealer than if you go out on your own and research vehicle financing directly with your bank and other financial institutions. Be a smart shopper and see which will provide the better overall APR on your new or refinanced car loan.
4. Lease, Don’t Buy
If you tend to buy a new vehicle every few years, especially without paying off the previous one, get yourself into a leased car or truck. Yes, you are making payments on something you will not own, but you are also getting a newer model when you want it without the financial overhead added to your new car contract. In addition, auto payments to own your vehicle include the purchase price of the car or truck, the APR, and depreciation for lost value. When you lease, you’ll pay a monthly amount plus sales tax in most cases. That’s it.
5. Don’t Go Crazy
Of course, you want the latest and greatest luxury or sports automobile, who doesn’t? But the higher the price, the higher the interest in the end. Do not spend more than you can afford, even though it’s tempting to because you’re financing the contract. You will likely get a lower APR on the used model of the same brand new car you are looking at, and if it’s in good condition with minimal mileage, there’s no point in eating additional cost and interest on the newer car. Think the Great Recession and millions of people buying houses they couldn’t afford. Don’t make the same costly mistake.
These are five ways you can lower the APR on your new or refinanced car loan. The higher the APR, the harder it will be to pay off the vehicle. Be a smart shopper and look for the best financing options available to you, or be an even smarter shopper and save your money until you can purchase your new vehicle in cash. If that’s not possible, do everything you can to get the lowest APR, whether you are buying a new car or refinancing your existing contract.