Factors Affecting Auto Loan Rates

[Anonymous]

So I plan on applying for a car loan this summer and wanted to know some more advanced tips for getting the lowest possible rate.

(I know this topic has been covered numerous times before, but I plan/hope that this thread will help me, and others, identify some of the more subtle factors of financing a vehicle.)

In my case in particular, I first plan on going through my credit union (BECU), and then see if the manufacturer (Audi financing) is able to beat that interest rate. Below I will list some of the factors I believe influence the rate and maybe get some feedback on what actually does and doesn't affect it.

(Post updated as of 5/5/2012 with thread feedback/answers)

Credit Score: This one is pretty self explanatory. Higher the credit score, generally, lower the interest rate. For a general/rough idea, look here:

http://www.myfico.com/HelpCenter/Autos/

*Some financial institutions have their own Credit Score vs Rates tables online (visit their website)

Down Payment: Higher the down payment, lower the interest rate. This is also known as LTV (Loan-to-Value): lower LTV may qualify for a lower rate. The minimum recommended down payment is 20%-25% because this reduces/eliminates the possibility of you becoming ‘upside-down’ on the loan. Also, they figure the more of the car you own; the less likely you are to default on the loan. (Note: Unless otherwise noted, traditionally, you won't get a further rate discount for putting down more than 20%. However, depending on your credit circumstances and/or amount requested, it may be valuable to do so to help get approved.)

Car Condition (New vs Used): Lender will favor (lower rates) new cars over used cars because there is less of a risk involved. There are instances, however, with a relatively new 'used' car will pull the same rate as a completely new one. For example, with BECU, I know if the car is 3 years old or newer, it can potentially qualify for the 'New Car' rate.

Term Length: Shorter the term length, lower the interest rate. Typically, there isn't a rate discount associated for loans under 48-months (60-months and under pulls the same rate with BECU. This is probably due to the fact that any shorter loans will cut into the bank's profit margin.)

Expenses-to-Income Ratio: This may play a role because 'expenses' would encompass any debt (minimum monthly payments) you are obligated to pay. That said, it wouldn't hurt demonstrating a high disposable income in relation to your gross income, especially when in the process of getting approved.

Loan-to-Income Ratio: It is generally advised to maintain, at most, a monthly car payment of 25% your gross monthly income. Not to say any more will or will not affect approval/rates (case-by-case basis), but you typically won't raise any eyebrows staying within these limits.

Job/Career Length: As long as there isn't a long period of time of unemployment, job/career length should not affect the approval process. (Note: Someone with a high score can secure top tier financing with no employment if they are pulling income from other sources.)

*When applying with BECU, they said it was a plus that I was with the job/company for 2+ years. Maybe for approving purposes, considering the amount (>30k) I was requesting, it could come into play.

Residency Location: Unlike car insurance, geography has no affect on rate other than regional programs that are offered by the bank.

Payment Method: I know with BECU, and possibly other banks, if you sign up for an automatic payment method, you get lower rates. With BECU, specifically, you get a 0.5% reduction if they automatically withdraw the monthly payments from your BECU account.

Additional Coverage/Service: Example of coverage/service is GAP insurance, extended warranty, scheduled maintenance package, etc. Since in the end, in most cases, this will put more money in the bank/dealership pocket, they have more of an incentive to give you a better rate to improve the value of the additional service/coverage. (Note: A dealership can give you a lower rate if you agree to buy GAP -- that’s negotiating.  A dealer cannot tell you the bank will offer a lower rate if you "insure" your loan with GAP -- that’s illegal.)

 Let me know if I missed anything.

[marty56]

Some CU's (RBFCU in San Antonio) also look at your relationship with them to set rates as well.  Also some may lower the rate if you use direct payment from your checking account.  Both these are minor compared to the ones you listed though.  Great list!

[Anonymous]

Although you've gone through some great lenghts to do your research I would honestly say that most of what your asking is factored if your on the cusps of being approved for a loan. It's actually quite simple. Do you have good credit? Do you have good lenght of history? Are you a low risk borrower (time on job, annual income, field of work)? Do you have practice with large ticket items?

If the answer is yes to all (most) of these questions the questions for the financiers should go as follows...

For the CU

1. What's your best advertised rate?

2. Can you beat Audi's best advertised rate?

For Audi

1. What's your best advertised rate?

2. Can you beat my CU's best advertised rate?

That's about it!

Many of the statements and topics posted are what sales managers present to banks to get you the best rate if the bank is teetering on an approval or preferred tier.

[Anonymous]

Marty, that's a good one! Almost forgot about payment method -- added it to the list

Teen, great way to put it in a nutshell. I suppose I was trying to build a 'portfolio', so to speak -- more (positive) points he/she has of you, the easier (hopefully) it will be to fight the bank on your behalf.

[marty56]

I forgot to add that sometimes a lender will lower the rate if you get GAP insurnace which would actualy cost you more in the long run if you never used it.

[marty56]

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@Anonymous wrote:

Many of the statements and topics posted are what sales managers present to banks to get you the best rate if the bank is teetering on an approval or preferred tier.

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I am not convinced that a dealer puts their best rate on the table when you first apply for the loan.  When DW purchased her truck, she got a pre-approval from our CU and the dealer first offered her a higher rate until she stated that she had a better rate from a CU and then they matched the rate and offered her a good deal on maintenance.

Buying a car is like a poker game.  Much better to know what is in the other person's hand and the more intel you have, the better deal you can get.

[Anonymous]

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@marty56 wrote:

I am not convinced that a dealer puts their best rate on the table when you first apply for the loan.  When DW purchased her truck, she got a pre-approval from our CU and the dealer first offered her a higher rate until she stated that she had a better rate from a CU and then they matched the rate and offered her a good deal on maintenance.

Buying a car is like a poker game.  Much better to know what is in the other person's hand and the more intel you have, the better deal you can get.

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Marty you are absolutely right about this. The key word for my response is, "advertised." Some (but not all) auto finance companies offer 0%, 0.9%, 1.9%, 2.9% as their super prime rate. These types of rates are a bit more difficult for CUs to beat as they don't offer much in return to the bank. My response is limited to people who qualify for the absolute best rate and I should have mentioned that!. I am a big proponet of going into dealerships with a good rate from an outside bank and forcing the dealer to earn your business.

[Anonymous]

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@marty56 wrote:

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@Anonymous wrote:

Many of the statements and topics posted are what sales managers present to banks to get you the best rate if the bank is teetering on an approval or preferred tier.

---

I am not convinced that a dealer puts their best rate on the table when you first apply for the loan.  When DW purchased her truck, she got a pre-approval from our CU and the dealer first offered her a higher rate until she stated that she had a better rate from a CU and then they matched the rate and offered her a good deal on maintenance.

Buying a car is like a poker game.  Much better to know what is in the other person's hand and the more intel you have, the better deal you can get.

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This is correct because dealers mark up the interest rates.  Say they get a rate back from the bank of 5%.  Most dealers will offer you that loan at 7% where they keep the extra 2% interest as back end profit on the deal.  If you don't accept, or have a better rate, they can come back with say only 5.5%, cutting their profit from 2% to 0.5%.  As far as I know, the bank rates don't change, just the dealer added on profit.

[UpNComing]

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@marty56 wrote:

I forgot to add that sometimes a lender will lower the rate if you get GAP insurnace which would actualy cost you more in the long run if you never used it.

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This is actually a form of jamming and is illegal.  The bank would never give a discount on rate for gap or life and disability.  This could land a finance manager in cuffs.

[Anonymous]

Good to know!

I assume its only illegal if the bank does this, but if the dealership was to offer a lower rate (assuming they already added to the manufacturer's quoted interest rate for profit), it would be fair game (i.e. not illegal).

For example, if the dealership got a 3% quote from the bank and was going to offer you 3.5% (0.5% profit), they can legally reduce it to say 3.2% if you agreed to get extended warranty, for example. (correct me if I'm wrong)