Negotiating a great price on a new car is just half the battle. You need an auto loan with competitive terms to make it a great deal. Loans vary by lender, the borrower’s credit and regional factors. Shopping around with at least three lenders and getting prequalified is the best way to improve your chances of getting favorable auto loan terms.
When comparing your options, be mindful of the interest rates, terms and fees proposed by each lender. If you can get your credit score in the good to excellent range — typically 670 or higher — you’ll make yourself a good candidate for inexpensive financing.
6 steps to take before applying for an auto loan
Try not to wait until you arrive at the dealership to secure financing. Although many dealerships shop your information around, you will be limited to loan offers from lenders in their network. That means there’s a chance the terms you receive may not be the best available to you. You may struggle to negotiate favorable terms with the dealer if you don’t already have an offer.
Shopping around and getting your finances in order can help position you for a great deal.
1. Check and improve your credit score
The first step in this process is getting familiar with your credit history. Your credit score is one of the biggest factors determining your auto loan rate — the higher your credit score, the lower your rate. Borrowers with excellent credit have average rates of around 4.75 percent, while borrowers with poor credit average 13.42 percent, according to data from Experian.
|781 to 850||4.75%||5.99%|
|661 to 780||5.82%||7.83%|
|601 to 660||8.12%||12.08%|
|501 to 600||10.79%||17.46%|
|300 to 500||13.42%||20.62%|
You can check your credit score online, and your bank or credit card issuer may even send you a free update every month. If you’d like a more detailed view of your credit health, you can also access your credit reports from each of the main three credit bureaus (TransUnion, Experian and Equifax) at AnnualCreditReport.com.
Minimum credit scores vary by lender, but you’ll typically need a score in the mid-600s to qualify and above 700 for the best rates. If your credit score needs work, take some time to improve it before applying for your loan by paying down existing debt, making timely credit card payments and avoiding any other credit applications. Otherwise, you could pay a fortune in interest if a lender does decide to approve you for an auto loan with a low credit score.
Improving your credit score can significantly lower your auto loan rate.
2. Do your research
Online research is key when deciding which auto loan is right for you. An online car finance calculator can help you determine which type of financing suits you, and reviews of auto loan lenders can help you narrow your list of potential companies. When exploring lenders, consider traditional banks, credit unions and online lenders as they all offer auto loans.
Pay close attention to interest rates, repayment terms, required money down and any fees and penalties that come with the loan. You can also look up lenders on the Better Business Bureau to confirm that your options are trustworthy.
Investigate potential lenders’ options, terms and customer reviews to ensure they are reputable.
3. Shop the total loan amount, not the monthly payment
Some lenders stretch out the repayment period on car loans and market the lower monthly payment to make the loan more enticing. But by doing so, you could end up borrowing a much higher amount than you initially intended and pay more in interest over the loan term.
The only time you should consider the monthly car payment is when you privately calculate how much you want to spend for your car. After that, avoid discussing monthly payments.
Shop around based on the amount you’d like to borrow. You can tinker with your repayment term and monthly payment later.
4. Limit loan applications to a two-week period
Every time you apply for a loan, a hard inquiry is generated. However, the FICO credit scoring model lets you shop around for a car loan within a 14-day window and counts all new applications for credit as a single inquiry. This is referred to as rate shopping and generally won’t hurt your credit score.
Some lenders also offer online prequalification tools that allow you to view potential loan offers, payments and interest rates without affecting your credit score. You can take the process a step further by getting preapproved to receive a formal loan offer for a set amount. This means the lender has reviewed your credit history, and required documentation and decided you are a good fit for an auto loan. Most auto loan preapprovals are valid for 30 to 60 days.
Limit your shopping period to reduce any negative impact on your credit score.
5. Compare car loan quotes
Once you have done your research and have a shortlist of preferred lenders, compare pricing. The best way to do this is to get quotes from a few companies since the lowest APRs advertised on their websites won’t necessarily be the APR you’ll receive. Refer to the preapprovals you got in the last step if they’re still valid. Otherwise, resubmit your information for updated quotes.
When reviewing quotes, pay close attention to both the APR and the repayment term. Even if a longer-term loan has a lower monthly payment, you’ll pay more in interest over time.
Compare interest rates and terms from at least three lenders.
6. Read the fine print
After getting loan quotes, look through the fine print. This binding agreement will follow you for years, so you need to know what you are getting into.
Pay close attention to the mandatory binding arbitration, prepayment penalties, loan processing costs and any other fees the lender may charge. Binding arbitration removes your ability to sue the lender if something goes wrong, and prepayment penalties are fees assessed if you pay off the loan early.
The fine print contains details about fees and restrictions that could add to the overall cost of your loan.
The bottom line
Getting the best rate for an auto loan relies on your credit score and finances as much as the lender you want to borrow from. Shop around and know what the average rates are for your credit score before you apply.
This puts you in a good position to negotiate financing at the dealership — if that’s what you choose to do. And if you don’t, you will still be able to narrow down your options and select the lowest rate or best terms for your auto loan.
Frequently asked questions
Here are the answers to some commonly asked questions that could help you get the best auto loan rate.
It’s possible to get approved for a 0% interest rate on a car loan. Automakers sometimes offer these loans through their financing companies to attract well-qualified customers and boost sales. You’ll typically need an excellent credit score — usually 800 or above — to qualify. Most lenders also evaluate your employment history and debt-to-income ratio to determine if you’re a good fit for a 0% interest rate car loan.
Conditional financing is a statement from your lender listing the conditions you must meet in order to receive your loan funds. If the financing is “contingent” or “conditional,” the lender can change your agreement later, leaving you with less advantageous terms. Never take a car from a dealer until the financing — down payment amount, interest rate, length of the loan and monthly payments — is finalized.Also, be aware of yoyo scams, which involve the leadership offering you a very low interest rate only to rescind their offer later and swap it out with a much higher rate. You can avoid these scams by reading the fine print, asking questions to clarify disclosures you don’t understand and walking away if the terms do not work for you.
A good auto loan rate is generally any rate below the average for your credit profile. For drivers with good credit, the lowest rates may be anywhere from 2.5 to 5.5 percent, while drivers with poor credit may see rates between 9.5 and 20 percent. Shop around so you can choose from workable rates for your financial situation. A good loan has low fees and offers repayment terms that make sense for you.
You can typically get preapproved for an auto loan online. The lender will conduct a soft credit check and ask for basic financial details, including your Social Security number, employment status, state ID and income. You’ll often receive a decision from the lender in minutes.
It’s usually best to save up for a down payment when applying for an auto loan. You could get a lower monthly payment and qualify for a better rate. Edmunds recommends aiming for 20 percent down, but the average down payment is closer to 11.7 percent.
Yes, you can negotiate auto loan interest rates. Like you negotiate vehicle prices, you can try to lower your rates before signing off. One of the best ways to secure a lower rate is by making a larger down payment or choosing a shorter term.
The best time to buy a car tends to be the end of the year, as dealers are trying to reach quotas. Other times to look for deals include the start of the week and holidays such as Black Friday, Memorial Day and the Fourth of July.