How to get a better interest rate on your car loan
Most Americans rely on cars to get around, but recent data shows that buying a new car may now be out of reach for middle-income earners.
The average cost of a new vehicle sold in May was $47,148, up $472 from the previous month, according to Kelly Blue Book. That coincided with a car’s average monthly payment of more than $700, the highest ever, according to Cox Automotive/Moody’s Analytics Vehicle Cost Index.
Despite the increased demand for new cars since the start of the COVID-19 pandemic, the stock of cheaper cars is low due to the lack of a major component used to make most vehicles.
Here’s why car prices are so high, how car payments are determined and what you can do to get an excellent deal on your next purchase.
Why do car prices go up?
NPR reported that shortages of computer chips, which are used to control windows, navigation screens and passenger screen sensors, due to the pandemic have driven up car prices.
In the first part of the pandemic shutdown, when most employees were working from home, car sales plummeted, and automakers scaled back orders for chips. During the same time, people bought laptops, iPads, televisions and other electronic goods, so chip manufacturers shifted their production to serve the companies that make these products.
However, as people leave cities for suburban areas, demand for cars has soared, according to NPR. With the limited supply of computer chips, car manufacturers began making expensive SUVs and fewer affordable sedans.
How are car payments determined?
When shopping for a car, many buyers rely on loans from the bank or dealer to finance their purchases.
How much you pay on the loan depends on the price of the car, whether it’s new or used, your down payment, the term of the loan and your credit score, according to Investopedia.com, an online financial information resource.
Investopedia said that car loan interest rates can significantly increase the total cost of a vehicle. Here’s what you need to know:
The best way to get a lower rate is to improve your credit score. If you have a low credit score, you should consider deferring a car purchase.
If your debt-to-income ratio is lower, or the amount of money you spend on monthly debt compared to your monthly income, you are more likely to get a lower rate.
Used car loans have higher interest rates than new cars, because used cars have a lower resale value.
Longer loan terms usually have higher interest rates.
You can use the Investopedia Car Loan Repayment Calculator to find out how much you can pay for your next car.
Can you negotiate the interest rate on a car loan?
Like the price of a car, the interest rate is negotiable, according to the Consumer Financial Protection Bureau.
The CFPB says that the first rate a merchant offers you may not be the lowest you can get, so it’s best to ask for a loan with better terms. Since merchants and lenders are not always required to offer you the best deal, negotiating can save you thousands of dollars over the life of the loan.
Karen Bennett writes for Bankrate.com that getting offers from multiple dealerships can help ensure you get the best price when buying a car, and you can take some of the stress out of the negotiation process by shopping for a car online.
You can also negotiate the value of your replacement, plus agent fees for setup, documentation, advertising, and other miscellaneous costs, US News reports.