Shopping for the Lowest Automobile Finance Rates

Most automobile buyers are overcharged on the automobile finance interest rates. On average, the automobile buyer will pay 3% more on automobile finance loans at a dealership. This over-charge can add up to more than $1,000 over the total loan period. The best ammunition to make sure that you are not over charged for automobile finance interest is to comparison shop lending institutions.

In addition to direct lending options (loan agreements made between buyer and bank or credit union) which generally offer a lower interest rate than dealers, buyers can now shop for automobile finance options on line. Most on line lending institutions can return an approval within a few minutes to a couple of hours. Many also offer payment calculators that are extremely useful in determining your monthly repayment plus interest. You can also calculate the length of the loan you need based on how much you can afford to repay each month. Another advantage to shopping on line for automobile financing is that there are many lenders all competing for your business. Once you are approved for a loan, you are armed with another negotiating tool to take with you to the dealer. Print out the on line offers and take them with you to the dealer. You can then negotiate a lower rate with the dealer.

Reduce the interest rates for your automobile loan

Another way to reduce the interest you will pay for automobile finance is to make a larger than the minimum down payment. Making a larger down payment reduces the amount financed and puts you in a better position to negotiate a lower interest rate. The less you have to finance, the shorter the term and monthly repayments. If you are shopping for automobile finance options based on the maximum amount you can afford to repay monthly, you may risk paying more over the life of the loan. You will pay more in interest charges for a 5 year loan versus a 2 year (or shorter) loan period. The 5 year loan may give you lower monthly payments, but you will pay much more in the end. Higher monthly payments for a shorter period of time will save you money. If you are unable to afford higher payments for a short term loan, you may want to consider a lower loan amount and shop for a cheaper automobile.

Finally, something that few people think about is the difference between the replacement value of the automobile and the balance of their automobile finance loan. This is called the "gap." It works like this: if you owe $15,000 on the balance of your automobile loan, but the value of the automobile for insurance purposes is $10,000, you have a "gap" of $5,000. If your automobile is totaled in a crash, natural disaster, or if it is stolen your insurance company will pay only $10,000, less your deductible. If you have a $500 deductible, then the insurance company pays $9,500. You will then owe $5,500 to the bank, credit union, or other lender. Dealers will try to sell you what they call "gap insurance" but do not buy it. They usually charge a premium for this coverage, add it into the total amount of the automobile loan, and you will be paying interest on gap insurance as well as on the loan principle.

Shop around for the best rates, and arm yourself with information before you sign any automobile finance agreement.