How to Prepare Your Finances to Get the Best Rate on Your Car Loan

Are you thinking about buying a car either this year or next? This week on the podcast we talked about how to get the best deals with your car loan!

Cars are typically the second biggest purchase (behind a house), so it’s wise to make sure you’re able to afford your car and that it fits in with your budget and goals.

I had the pleasure of chatting with David Jacobs, Vice President of Consumer Lending at Coastal.

He gave some fantastic advice and takeaways on what lenders look for and how they calculate what car loans you’re approved for.

The good news is that you can be proactive and start preparing your finances now, well before you-you start shopping around for your next car.

Here’s how you can make sure you’re getting a great deal on your car loan. 

Check Your Credit Report and Score

Your credit score is a big factor when it comes to what interest rate you’ll have for your loan so you want to make sure that it’s high enough to get those low rates.

Your credit score is determined by what’s in your credit report.

You actually have three credit reports, one with each credit bureau – Equifax, Experian, and TransUnion.

Your credit report is simply a record of your history of payments on your debts and helps lenders determine your creditworthiness.

While the records should be the same across the board that’s not always the case.

If you haven’t checked recently, go ahead and review your credit report, which you can get for free at AnnualCreditReport.

How to Raise Your Credit Score

While the exact algorithm on how they calculate the scores isn’t public, there are five key factors they look at that have an effect on how high or low your score is.

Payment History: Since 35% of your score is based on your payment history, this is a crucial factor you need to stay on top of.

Setting up your bill pay so your payments are never late is small step with big wins. When you check your credit report, really comb your accounts to make sure there’s no inaccurate information on payments.

Amounts Owed: You have to be wise with how much debt you take on because your debt to income ratio is another big factor (around 30%) with your credit score.

Carrying too much debt can make you appear financially strained, so avoid maxing out your credit cards or lines of credit. If you do use credit cards, paying off the balance every month is a fantastic move.

Length of Credit History: Since your payment history is a big factor, having a record of credit is related. Opening and closing several accounts can lower your score. 

Types of Credit: What kind of accounts do you currently have? Mortgages, car loans, credit cards, and student loans all factor in with your score, so be wise with what accounts you open.

Having a clearly defined budget and setting up bill pay can help stay on top of all of your accounts without having to stress out.

New Credit: Be careful with opening new accounts. Those discount offers at stores or the reward bonuses promised in those mailing can be tempted, but if you look at the bigger picture, it is often smarter to skip those.

Build Up a Solid Down Payment

One of the best moves you can make to keep your car affordable is by building a strong down payment.

With the average new car loan around $30,000, any money that you can put down can have a significant impact on your car payments.

Let’s say that you qualify for a $30,000, 60-month auto loan with an interest rate of 4.21%.

If you put down $3,000 (10%), your monthly payment is $500.

If you put down $5,000, your monthly payment is $463.

If you save $10,000 for the car, your monthly payment drops to $370.

But how can you save that amount when you already have so many bills to juggle?

Being a busy family of four, I can tell you that automating those transfers into savings has made an incredible difference with meeting our goals.

Waiting until the end of the month, after all of the other bills are paid typically means there’s little if any money left over to save. Instead, by treating your savings as a bill, you’re usually able to save significantly more.

Where you save also makes a difference too. Coastal has some fantastic savings options that can help you grow your down payment faster.

I hope these tips make saving up for your next car much easier and help you get the best deal on it!