It pays to shop around for an automobile loan, especially if your credit rating is not the best.

The reality is that consumers pay interest rates that differ greatly, depending on their credit rating and the amount of haggling they do. Although 5.5% is the national average for a new car loan, some people pay considerably more – as much as 20%.

The difference over the lifetime of a loan is considerable. A person who amortizes a $10,000 loan over three years at 15% will pay $1,600 more than someone who secures a loan at 5.5% (the equivalent of $45 per month).


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How Much Car Can You Afford?
Start by calculating how much you can really afford to spend on a car payment each month. Your loan payment together with all other credit payments should add up to no more than 15% of your gross monthly income. That means a person who makes $25,000 a year (about $2,083 a month) should pay no more than $312 per month. Don’t get seduced by a car and payments that will bust your budget.

What Interest Rate Can You Expect to Pay?
Order a copy of your credit report to see what type of credit risk lenders are likely to see you as. Lenders will order a copy of your report and base the interest rate they offer you on your credit history and your FICO score (a number that tells lenders what kind of borrower you are likely to be). If your FICO score is high – 700 or better – you can expect a preferential interest rate. If it is low, you can expect interest rates ranging from 10% to 20%. Look for mistakes in your credit report and correct them promptly.

If you have no credit history you may want to establish one by applying for a credit card and using it wisely to establish a positive credit history. Lenders are often nervous about lending to a customer with no credit rating because they have no idea what to expect.

Make Lenders Compete For Your Business
Once you know what interest to expect it’s time to shop around for the best deal. Start by meeting with financial institutions you do business with regularly. Generally speaking, the more accounts you have with an institution (checking accounts, mortgages, savings, credit cards), the more likely they are to lend you money at a preferable rate. If your credit history is poor you may want to approach smaller banks that are more likely to approve loans for people with a less-than-perfect credit history.

It is important to shop around and know your loan options, but be leery of applying for too many loans simultaneously. Your credit rating may be lowered if too several lenders apply for a copy of your credit report at the same time.

Take the Time to Get the Best Deal
Do not be pressured by the salesperson’s desire to sell the car now – or by your desire to own the car. Shopping around for the best financing can save you big dollars - and will ultimately be a very rewarding experience in its own right.