Should you settle for a high interest rate on an auto loan, or are there better financing options? That’s what we’re looking at this week.
Each Monday we’re tackling one of your pressing personal finance questions by asking a handful of money experts for their advice. If you have a general question or money concern, or just want to talk about something PeFi-related, leave it in the comments or email me at email@example.com.
This week’s question is from anonymous:
I have a credit score in the low 600s and just totaled my old car in an accident. Need a new-to-me ride. Lowest interest rate I have qualified for so far is 13.74 percent! I’ve asked around to a few family members and no one is able to co-sign. Any advice on getting a lower rate? Or do I take it and hope to refinance in a few years? Or do I try to get a lease? Or something totally different? I will be getting $1,200 in settlement from total loss. Live in MD (if that matters).
My stats: separated (divorce starting in the fall), two boys 16 and 13 (so looking at higher auto insurance and college soon), income $50,000.
This is what individual experts have to say generally about an issue that affects each person differently—if you want personalized advice you should see a financial planner.
There Are Plenty of Financing Options
A 13-plus percent APR certainly isn’t ideal, but it also doesn’t seem completely out of line, given your credit score, according to Greg McBride, Bankrate’s chief financial analyst. But you can look beyond your dealer for financing options—a bank, credit union or online lender may offer a lower interest rate.
“Given the uncertainty as to your post-divorce financial situation, credit and budget in particular, there is no guarantee of being able to refinance at a better rate later,” says McBride. “I’d caution against taking a high rate loan and just assuming you can get out from under it in another year or two—it’s possible, but you’d be stuck with 13.74 percent in the meantime.”
If you’re going with the dealer, Matt Jones, senior consumer advice editor for Edmunds, says you have a few different options that could potentially get you a better deal. You could buy a new car on a special sale (summer clearance sales are about to start, after all), or one that’s being replaced with a newer model. Dealers will give you a better deal so they can move inventory.
“In some cases, buying a new car can net you a lower monthly payment than a used car, once all the rebates and incentives are factored in,” says Jones. “And because interest rates tend to be lower on new cars than used cars, sometimes the better money is spent buying new.”
He gives this example:
A $17,000 loan on a used car at 13.75 percent gets you a payment of $394. A $20,000 loan for a new car at seven percent gets a payment of $397. It is very possible to buy a great new car for $20,000, and the average APR for your [credit] range hovers right around seven percent.
You may also be able to lease a car for the lowest upfront cost of any of the options listed. “Since the car will be brand new, no need to worry about upkeep costs, because you’ll be under warranty,” says Jones.
That said, you typically need a higher credit score to qualify for a lease. That’s why McBride and Jones say your best option is to use that $1,200 settlement as a down payment on a cheaper, used car. You may be able to look to peer-to-peer lending to get a loan, and your down payment will help mitigate the high interest rate levied. Plus, you’ll likely be able to refinance this way.
“Buy the cheapest used car that will do the job and you feel comfortable with,” says Jones. “The less expensive the car, the lower the interest charges. And if you pay the car off quickly, you’ll also reduce your overall interest charges.”
Staying on top of your payments will also likely increase your credit score, which means you’ll get a better rate in the future, should you need to buy a car again. Good luck!