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Car Buying

Buying a Car: Tips for Improving Your Interest Rate

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author photo by Doug DeMuro

If you're thinking about financing your next car, you're probably considering the interest rate. An interest rate is one of the most important aspects of buying a car because it determines just how much you'll wind up paying: A high rate means you might be overpaying, while a low rate often means that borrowing is an excellent idea. How can you get a lower rate when you're buying your next car? We have some ideas.

Shorter Loan Term

One of the easiest ways to improve your interest rate is to sign up for a shorter-term loan. For instance, while you might find that your bank is offering a 6 percent rate for 60 months, the rate may drop to 3 percent if you're willing to finance over 36 months -- or it could climb to 8 percent if you choose a 72-month loan term.

Lenders prefer shorter-term loans because it means they'll be paid back sooner. As a result, they offer a lower interest rate as an incentive to choose a short-term loan. Unfortunately, a shorter-term loan has a catch: Your monthly payments will probably go up, even though your interest rate will go down, because you're stretching out your loan payoff over a shorter period of time.

More Money Down

Lenders are often willing to give you a better interest rate if you increase your down payment. For example, although your rate might be 9 percent with nothing down on a $10,000 car, it may drop to 6 percent if you're willing to put down $3,000.

The reason for this practice is that you're less likely to be upside down on a loan (meaning that you owe more than the car is worth) if you put down a higher amount. In turn, this means there's less risk for the lender, so you'll get a better rate as an incentive to put down even more money.

Of course, this also has a catch: While you'll get a better interest rate, you'll have to spend more money up front in order to do so. This isn't always feasible for some shoppers, and others would rather not put down a large amount of money when buying a car.

Buy a Newer Car

Interestingly, you'll often find that buying a newer car will help improve your interest rate. Choose a 2004 model, and you might end up with a 12 percent rate, while a 2014 model may come with a 2 or 3 percent interest rate from an automaker.

There are several reasons that this is the case, but the primary one is that a lender takes on more risk when you choose an older car. An older car's value is more difficult to know -- and its future value is even more difficult to predict. This means lenders take on extra risk when issuing a loan on an older model.

Of course, if you prefer an older model -- or if you can't afford a newer one -- this advice isn't likely to help you improve your rate. But if you're looking for the best possible interest rate, choosing a newer car will likely help you get there.

This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
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Buying a Car: Tips for Improving Your Interest Rate