Whether you’re looking for the best deal on basic transportation or searching for the car of your dreams, it’s wise to look closely at your finances before you begin hitting the car lots to look for your next ride.
Not only do you need to consider the price of the car itself, but you also need to find out how interest rates could affect your loan payments and how you can improve your financial situation before you even start looking. Here’s how to do it.
Check your credit score
Your score helps determine what your auto loan interest rate will be. The higher your score, the more likely you’ll get a lower interest rate.
Many banks and credit card companies provide you with a free credit score these days, but you can also get a full credit report for free each week at Annualcreditreport.com. Experian says having a FICO® Score of 661 or higher will help you get the best auto loan rates.
Tip: Your credit score affects more than just interest rates. In most states, car insurance companies can use your score to set your premiums. Click here to find the best deals on cheap car insurance.
Pay down your debts
Let’s say you have a FICO® Score of 620, which is considered fair. You probably won’t get the best interest rates available, but if you lower the amount of debt you owe (which accounts for 30% of your score), you can likely improve your score and the auto loan interest rate.
For example, if you have a credit card with a $10,000 limit, it’s a good idea to keep your balance under $3,000, which will keep your utilization rate below the recommended level of 30%.
Here’s a hypothetical example of how much you might save with a higher score:
|
Loan Amount |
Credit Score |
APR |
Loan Term |
Monthly Payment |
Total Amount Paid |
|---|---|---|---|---|---|
|
$25,000 |
620 |
8% |
5 years |
$507 |
$30,414 |
|
$25,000 |
660 |
7% |
5 years |
$495 |
$29,701 |
|
$25,000 |
690 |
5% |
5 years |
$472 |
$28,306 |
Data source: Author’s calculations.
As you can see, a higher score could save you just over $2,000 over the loan term, depending on your rate. To improve your score, pay your bills on time and in full. Your payment history accounts for 35% of your score.
Find out how much your car insurance will be
Car insurance prices jumped by 26% in 2024, which means you’re likely paying far more for insurance than you were just a few years ago.
The bad news is that your car insurance costs could go even higher, depending on the type of car you buy. For example, cars with low safety ratings, high repair costs, electric vehicles, and even luxury cars may be more expensive to insure.
The good news is that you can ask your insurance provider how much your new vehicle will cost to insure. I once emailed my insurance company with the make and model I was considering buying so I would know the insurance costs before I made the purchase.
If you think you’re paying too much for car insurance, the best way to save is to shop around. Many people pay less for premiums when they compare quotes from the best car insurance companies and switch providers.
Shop around for the best loan
It’s probably not the best strategy to jump at the first auto loan you’re offered. Take the time to compare at least two or three auto loan options to see which one fits your budget.
Not all lenders have the same criteria, so comparing quotes means you might be able to find a lower interest rate and save on your monthly car payments. As you saw earlier, even a 1% difference in your auto loan rate could save significant money over the length of the loan.
No matter which car you choose, knowing your credit score, paying down your debts, and shopping around for the best insurance and auto loan will ensure you make the right decision for your budget.