How to Reduce Your Auto Loan Interest Rate

Car loan interest rates vary greatly and are based on a number of criteria, including your credit history and rating, down payment, type of vehicle purchased, and whether it is new or used. If your current auto financing arrangement offers unfavorable terms, you may be able to obtain a better rate by refinancing your car loan, with possible savings of hundreds of dollars over the life of your loan.

Instructions

Instructions

1

Before seeking new auto financing, pull out your current agreement to review various clauses contained within it. Determine whether there are prepayment penalties and, if so, what it would cost you to pay off the loan early.

Some lenders simply charge a percentage fee based on the outstanding loan balance. For example, if you owe $7000 on your car loan and the prepayment penalty is 1%, then you would be charged $70 by your financing company. If this amount is more than you would save through refinancing, you may not want to refinance.

Other loan agreements contain what is called the rule of 78s, under which interest charges are front loaded. With this type of loan arrangement, which is not as common as it once was, your first payments go toward interest only, with subsequent payments designed to reduce the principle. Most states restrict this practice or allow it only on short-term loans.

Finally, some car loans are precomputed and interest and principle payments must be paid, though no prepayment penalty are charged. In effect, when you pay off this type of loan early, you pay the same amount even if the interest charges have yet to accumulate.

2

Compare price quotes and offers. Now that you know what prepayment penalties you may face, do not allow that information stop you from pursuing refinancing. It does not cost you to look, but it may cost you dearly if you continue to pay your current lender's high interest rate by ignoring better terms.

Visit price quote sites such as LendingTree.com to obtain compare auto loan rates. If you bought your car new and have had it only for a few months, you still may be able to get a new car loan rate. Otherwise, plug in the data for your now used car and see what offers are available. Use the onsite comparison calculator to compare loan offers, then use the same calculator to compare the best offer with your current loan. Add in prepayment penalties and fees to get a true picture of your savings.

3

Accept the best offer. If you can save money after considering any prepayment penalties or other fees, then consider switching lenders.

Your new lender may pay off your current car loan itself or issue you a check to you, which you can use to close the previous loan. In any case, send future monthly payments to your new lender and inform your auto insurer of the new lien holder.