@Anonymous wrote:
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 on some of the more subtle factors)
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.
(Questions in Blue)
Credit Score: This one is pretty self explanatory. Higher the credit score, generally, lower the interest rate.
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 that 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. Will going higher than 20-25% affect the rate? Like 30% or 40%? Or does it not make a difference after that 20-25% point? Banks do like to be around 20% in equity. Usually you won't get any further rate discounts after 20%. In fact you can put too much down if the total amount financed drops below a certain level.
Car Condition: Whether it’s new or used. If used, how old is it and how many miles does it have. For 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. Does anyone know if either of these financial institutions distinguishes between a 24-month loan vs a 36-month loan for determining the rate? Or do you reach the optimal rate as long as you’re at 36-months or lower? There are rate discounts for 48 months in some cases. Less than 48 month loans are less profitable for the bank. Over 60 months will take you in the opposite direction as it becomes high risk.
Expenses-to-Income Ratio: I seem to remember when I went for my first car loan (right out of college), they asked me expense/income questions, but not sure if that was part of the pre-approval process or determining rate process. For example, will having large disposable income (i.e. no outstanding debt/loans, low rent (<10% of income), no dependents, etc.) play a role? Although debt to income does come into play, banks don't pay a ton of attention to this unless your score is low, you have negative credit or if you are showing little disposable income after your monthly minimums on your credit file.
Loan-to-Income Ratio: Similar to above, but I think ‘experts’ say your monthly car payment shouldn't’t be more than 20% of your gross monthly income. Does it make a difference if the payment is higher than 20% or any other percentage for that matter? 25 is the rule of thumb.
Job/Career Length: Will the length of your career or job position play a role? As in comparing someone straight out of college vs someone with a 10/20-year career or no? As long as you have no long employment gaps your fine. Someone with a 60 month job can pull the same rate as someone with a 20 year job as long as the credit is good. Although someone with a high score can secure top tier financing with no employment if they are pulling income from other sources.
Residency Location: Similar to insurance premiums, will living in a ‘safer’ neighborhood/county affect rates? Geography has absolutely no effect on rate other than regional programs that are offered by the bank.
Payment Method: I know BECU, and maybe other banks, if you sign up for a 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. Thats negotiating. A dealer cannot tell you the bank will offer a lower rate if you "insure" your loan with gap. Thats illegal.)
Let me know if I missed anything
There is a "sweet spot" you're shooting for when financing a vehicle. You want to hit all the discount available to you. Usually discounts come in .25% increment drops for loans over 25K, term and in equity on the vehicle financed as well as high fico scores.
CSP ($5k); Chase MileagePlus Explorer Visa Sig. ($6k); Chase Freedom Visa Sig. ($6k); BankAmericard Cash Rewards Visa Sig. ($5k); Amex PRG (NPSL); Amex BCE ($1k); Citi Thank You ($5.4k); Barclay Apple ($4.2k) CapOne Cash ($2.5k) CapOne Platinum ($2.5k) Wells Fargo Home Project Visa ($10.3k) Discover IT ($1.5k) WalMart ($3k); Lowes ($3k); Amazon ($5k); Kohls($1.5k)
Scores: Equ Fico 715 ~ Exp 724 ~ TU Fico 682
