How to renegotiate car loan terms if your credit improves

Sliding behind the wheel of a new car is a thrilling experience. According to  the Federal Highway Administration, Americans are driving more than ever before. While many of these new drivers will take to the roads using car loans to finance their purchases, however, most will opt into a deal without negotiating terms. 

Savvy shoppers often negotiate their loan rates with the lender before committing to the deal, but few people realize that they can negotiate the interest rate on their car loan even after closing. In this post, we share how you can use improvements in your credit score to renegotiate the interest rate on your car. 

The benefits of building credit

Your credit score plays a major role in determining your financial options from interest rates to the types of products you have access to. If you have a low score  (below 580), it may be difficult to access credit products like credit cards and loans; however, it’s possible to build your credit score into the excellent range within a few years with enough time and effort. 

How does your credit score work?

When you apply for a car loan, the lender will check your credit history through one of the three main U.S. bureaus, TransUnion, Equifax or Experian. 

People with a score below 580 are typically considered subprime borrowers and may find it harder to obtain a loan and will usually pay higher interest rates when they do. Individuals with FICO scores between 580 and 669 are considered “fair” while a “good” score is between 670 to 739, “very good” falls in the range of 740 to 799 and anything over 800 is “excellent.”.

Over 20% of Americans have credit scores between 800 to 850, which makes them prime lending customers.  An 800+ credit score will usually get you the bank’s best rates and low annual percentage rates (APRs). 

How can you improve your credit score?

There are two primary ways to improve your credit score. First, pay all of your bills on time. Credit card bills are not the only credit account that reports to the three major credit bureaus. Rent, utilities and phone contracts all require prompt payment. Pay late and your landlord, utility or phone provider may report your late payments to the credit bureaus. You can steadily build your credit score to the excellent range by meeting your monthly payments on time.

The second strategy to improve your credit score is to bring down your credit utilization ratio, the percentage of the line of credit you typically use. If you have a credit card with a $3,000 limit and max it out every month, for example, you could negatively impact your credit even if you pay off the account in full at the end of every month. To bring down your utilization, consider opening other cards and spreading the balance across them to keep the ratio low. 

Steps to negotiating a better interest rate on your auto finance

Negotiating with lenders can be intimidating for some people, but with preparation you can secure a better interest rate. 

Prepare for the negotiation by reviewing the initial contract from your lender. If you can’t find the contract, then call your lender and ask them to email you a copy. The law requires all lenders to keep a copy of the sales contract on-site.

After receiving your original contract, review all clauses relating to repayment penalties, if applicable, as you’ll have to factor these penalties into any refinancing deal. Note that if the payment penalty is significant, you might want to avoid renegotiation. Some lenders may input these clauses in the sales contracts to prevent renegotiation down the line. 

If you’ve held an account with a bank for a long time, mention that you’re a longstanding customer and with a solid loan repayment history, which may help you build a case for a better rate. 

Make the most of the competition 

In today’s competitive economy, companies are often willing to match the terms set by competitors in order to gain or retain customers. To get a better rate, consider shopping around for a car loan and asking your loan provider if they will adjust your APR or payment terms. 

Shop around for a new loan by speaking with refinancing companies or visiting your car dealer. Ask new lenders you are considering to send you refinancing quotes then 

Take the new offers back to your lender

With your batch of three or four prime quotes, it’s time to contact your lender again. Tell the lender that you shopped around and found a better deal. Email them your quotes from your new lender, and ask them to consider adjusting your rate again.

With this strategy, most lenders will buckle under the pressure and reduce your rates. However, some may still put up resistance, and tell you that they can’t help you in this situation. Only hang up the phone when you know that you’ve done everything within your power to get the lender to renegotiate.

What if your lender is close to the new offers?

In some cases, your current lender might come back to you with terms that are close to the quotes the competitors gave you. In this case, you’ll have to think about whether to change or keep your credit provider.

The thought of paying a cheaper monthly payment on your vehicle loan might be appealing, but there are other costs you need to consider. When you refinance with a new credit account, you’ll have to cover the total cost involved with transferring your balance. You’ll also need to account for any other charges that come along with setting up a new account with a new provider.

Consider these costs before making your final decision. If your lender comes back with something close to the offer, then it might be the better option. It’s probably a better idea to remain with your current credit provider than open a new facility. 

Review the terms before you sign

Before you put pen to paper and commit to the new refinance deal, remember that every agreement you sign is legally binding in a court of law.

While there’s only a slim chance that the lender might alter the terms of your agreement on the contract, it can happen. Don’t let them catch you out with any hidden clause or conditions that could prevent you from refinancing again in the future.

Make sure your review the APR, as well as the totals for your monthly payments. Do your calculations and make sure that the APR corresponds with the monthly payment amount. Some dealers or lenders may also offer you in-house insurance when you initially buy the vehicle.

If your credit score improved in the interim, then you could also qualify for a discount on these financial products as well.

 First-timers should review their loan terms annually

If you’re applying for a car loan for the first time, then chances are that the lender is going to hit you with a higher interest rate for the loan duration. You’ll have to accept this for now, but you can renegotiate in the future.

Before you sign the contract, make sure no clause stipulates you can’t refinance terms in the future.

Your credit score should continue to improve as you make your monthly car payment on time. After a year of ensuring that all of your credit facilities are in excellent condition, you can renegotiate with your lender for a cheaper rate.

Make this an annual practice and you could end up receiving a lower rate on your monthly payments as your credit improves.

Wrapping up – next time take a lease

Buying a new car is exciting, and driving it off the lot is an awesome feeling. However, that feeling tends to wear off over time. Three years after you bought your new car, you’re probably cursing it and looking to buy another.

Modern cars don’t have a design that focuses on longevity. In the past, auto manufacturers built vehicles that were easy to maintain, with low-cost parts. However, modern cars have electronic systems and expensive components that cost a fortune after the vehicle exits its maintenance plan.

Therefore, if you don’t have an issue with ownership of your vehicle, try a lease on your next car. With a lease, you don’t take ownership; you drive the car for a set period and then change it out for a new one.

Leases are generally far more affordable and you might have the chance to upgrade your model with the cost savings. The next time you’re thinking about buying a car, go with a lease instead; it’s the better longer-term option for your cash flow.