Getting a great deal on an auto loan can save you thousands over the life of the loan. With interest rates on the rise, finding affordable financing is more important than ever. This comprehensive guide from the experts at FinanceDevil will walk you through every step of how to get the best auto loan rate and save thousands.
Check and Improve Your Credit Score
Your credit score plays a major role in determining auto loan rates, so checking and optimizing this number should be your first step.
Scores are grouped into tiers that lenders use to set rates. The higher your credit score, the lower your interest rate will likely be:
- Exceptional Credit (781-850) – Qualify for the lowest rates, usually under 6%
- Very Good Credit (740-780) – Expect competitive rates around 7%
- Good Credit (670-739) – May pay 8-12% interest
- Fair Credit (580-669) – Will pay higher rates from 13-20%
- Poor Credit (300-579) – May only qualify for subprime loans at 20%+
Before applying for an auto loan:
- Check your credit score for free through your bank or a site like CreditKarma
- Review your full credit reports for errors at AnnualCreditReport.com
- Create a plan to improve your score if needed
Paying down debts, making timely payments, and avoiding new credit applications in the months preceding your auto loan can help boost your score. However, building credit takes time, so start strengthening your profile as early as possible.
Compare Quotes from Multiple Lenders
Interest rates and loan terms vary significantly between lenders. Comparing loan offers from several providers is key to finding the best deal.
Cast a wide net by exploring quotes from:
- Large banks
- Small community banks
- Credit unions
- Online lenders
Sources to consider include:
- Your primary bank or credit union
- Lenders you have existing loans with
- Referrals from friends and family
- Review sites like Bankrate and NerdWallet
Online lenders like Lightstream and PenFed often offer competitive rates to borrowers with good credit. If your score needs improvement, specialized subprime lenders may provide financing options.
Spend time researching each company’s fees, repayment terms, borrower reviews, BBB ratings, and other policies before applying.
Shop Loan Amount, Not Monthly Payment
Some lenders will stretch repayment terms to advertise a lower monthly payment. But longer loans cost more overall in interest, so the true cost of borrowing is obscured.
Instead of fixating on the monthly payment:
- Determine the total purchase price you can afford
- Estimate a comfortable monthly car payment range
- Then, compare loan quotes based on APR and total interest paid
Opting for a shorter loan term often yields the best deal. You get a lower rate and pay less interest since you’re not financing the car for as many years.
Limit Applications to a 14-Day Period
Submitting numerous loan applications can temporarily damage your credit score. However, both FICO and VantageScore have protections for “rate shopping” – comparing rates from multiple lenders.
As long as you restrict applications to a 14-day window, the credit bureaus will count them as a single inquiry when calculating your score. This prevents your score from taking multiple hits.
Before submitting official applications:
- Research lenders and pre-qualify online
- Verify offers are still valid before applying
- Then, complete applications within a 14-day span
Read the Fine Print Carefully
Be an informed borrower by analyzing the fine print for any “gotchas” before signing your loan agreement.
Pay special attention to:
- Interest rates and APR
- Length of the loan term
- Required down payment
- Early payoff penalties
- Mandatory arbitration clauses
- Processing fees and other costs
Avoid agreements with conditional financing terms or provisions allowing the lender to modify the contract after signing. Get all approval conditions and exact loan details finalized in writing first.
Time Applications Strategically
In addition to shopping rates across multiple lenders, timing your application strategically can score you an even better deal.
Dealers and lenders offer enhanced discounts and financing offers at certain times to drive more business. Prime windows include:
- End of the month
- End of each quarter
- Major holidays like Memorial Day, July 4th, etc.
- Year-end clearance events
If your credit is in good shape, consider applying during one of these promotional periods to maximize savings.
Optimize Other Factors to Reduce Rates
Beyond shopping lenders and strategizing timing, several other steps can qualify you for a lower rate or secure preferential pricing:
Make a larger down payment – Putting more money down signals you’re a lower-risk customer to lenders. Even 10-15% down can make a noticeable impact.
Choose a shorter loan term – Opt for a 3-year loan instead of 5-6 years. The faster payoff often comes with a discounted rate.
Enroll in autopay – Most lenders provide a rate reduction around 0.50% for setting up automatic payments.
Join a credit union – If eligible, credit union auto loan rates are typically 0.5-1% lower than banks.
Buy new instead of used – New cars qualify for the lowest rates since they haven’t depreciated yet.
Ask lenders if they offer discounts for any of these factors to reduce your rate even more.
Gather Documentation Required for Approval
To apply for auto financing, you’ll need to provide specific documents to substantiate your identity, income, and overall financial health:
- Driver’s License or Passport
- 2 Recent Paystubs
- Tax Returns (Self-employed)
- Proof of Insurance
- Down Payment/Trade-In Documentation
Having these ready streamlines the application process so you can lock in rates fast before they rise further. Both dealers and lenders will require them.
You’ll also need to accurately report:
- Gross Monthly Income
- Existing Debts/Expenses
- Down Payment Amount
- Trade-In Details (if applicable)
Precise details qualify you for the largest loan possible while keeping payments affordable per your income.
Build a Starter Emergency Fund Before Buying
Some financial experts recommend saving up a small cash reserve even before making a major purchase like a car. This way, you have a buffer to cover emergency expenses if money gets tight after taking on a new monthly payment.
Aim to set aside 1-2 months’ worth of living costs before purchasing your vehicle. Opening a high-yield savings account gives your funds an extra boost while you save.
Then, focus extra payments toward quickly replenishing your emergency stash before funneling additional cash to boost retirement, college, or discretionary goals.
Understand the Impacts of a Car Loan on Your Finances
Committing to an auto loan is a major financial decision that can affect several aspects of your money situation, both now and in retirement. Before signing on the dotted line:
- Calculate the true monthly cost – Factor in higher insurance premiums, fuel and maintenance costs associated with owning a car on top of just the loan payment
- Account for higher monthly expenses in your budget – Make room for increased transportation costs when planning spending and savings
- Review the impact on retirement savings – Don’t let a car loan sideline long-term priorities. Adjust contributions to accommodate the payment while still funding retirement savings appropriately. Use online calculators to run the numbers.
- Check your debt-to-income ratio – Keep total monthly debt payments (including the new auto loan) below 40% of your gross monthly income, as lenders recommend
- Consider buying used instead – You can get nearly-new cars for substantial discounts, allowing you to keep the loan amount and payment lower
The average monthly car loan payment reached over $700 in late 2022. Make sure your budget can comfortably accommodate this increased cost.
READ ALSO: How to Calculate APR on a Car Loan
Avoid 72-84 Month Loans to Get the Best Deal
In recent years, lenders have begun offering extended loan repayment terms up to 6-7 years to give buyers the option to obtain more expensive vehicles.
But while you may see advertised rates as low as 2-4% on these overlong loans, they’re ultimately more costly and risky:
You’ll pay thousands more in interest – Years of accumulated interest radically inflates total repayment costs. Opt for the shortest term you can afford.
Cars depreciate faster than you can pay down principal – Your loan balance may exceed the car’s resale value for most of the loan, meaning you could face substantial negative equity if you want to trade it in or sell it.
Loans outlasting warranty coverage leave you unprotected – Once your 3-year/36K mile manufacturer warranty and 5-year/60K mile powertrain warranty expire, you’re on the hook for hefty repair bills while likely still making payments for another 2-3 years.
Unless you plan to drive your vehicle well past 10-15 years and 200-300K miles, a loan exceeding 5 years is financially risky. Choose affordable monthly payments over the allure of lower short-term rates.
Avoid High-Pressure Tactics to Buy Immediately
Eager salespeople often use persuasive language and false urgency to pressure buyers into rushed decisions before weighing all their options. Stand firm against these tactics to avoid regretting your purchase or loan terms later:
Don’t fall for “today-only” special pricing – Daily incentives and promotions change frequently as part of normal dealership sales practices. Similar offers will surface again. Walk away if you feel rushed.
Test drive the exact vehicle you may purchase – Don’t get emotionally attached before ensuring it meets your needs. Thoroughly inspect paint, body panels, interior, mechanical operation, and test drive performance before considering buying.
Go home to sleep on the decision – Politely explain you never make major purchases on the spot. Letting negotiations sit overnight cools emotions and gives you space to evaluate with a clear head before moving forward.
Take your time and don’t let smooth-talking salespeople pressure you into a deal not right for you.
Compare Rates Offered by Lenders vs Dealers
Many shoppers assume dealers always offer the most competitive auto financing. However, this isn’t necessarily the case.
Dealers make money by marking up interest rates from their lending partners through a practice called “reserve” – so their loan offers may cost you more, not less.
Always compare financing from outside lenders against the dealer’s proposed terms. Then negotiate the best deals available against each other to maximize savings.
And remember, you can secure financing independently before visiting dealerships so you enter negotiations already equipped with your strongest offer. This also helps you avoid overpaying on impulse if tempted by slick financing pitches.
Consider Down Payment Assistance Programs If Needed
For buyers unable to make a 20% down payment, specialized assistance programs offered by credit unions and other non-profits can bridge the gap.
These programs provide affordable secondary financing options to cover your down payment in exchange for completing financial education courses. This allows members to purchase vehicles while avoiding high-interest subprime loans.
So if personal savings fall short of 20% down but you still demonstrate responsible credit management, explore these programs in your area. They provide better loan terms to ensure an affordable monthly payment.
Leverage Trade-In Equity and Cash Rebates
If trading in your current vehicle, be sure to negotiate its value separately from the purchase price of your new car. This ensures you extract maximum value. Kelley Blue Book Instant Cash Offer tool can provide real-time trade offers.
Combine the equity from your trade-in, any manufacturer rebates or incentives currently offered, and whatever cash you can contribute to minimize the amount you must finance. This saves substantially on interest charges.
Manufacturers and dealers advertise updated rebates monthly, so check websites for the latest deals when shopping.
Avoid Significant Auto Loan Rate Hikes
Auto loan interest rates track closely with overall economic conditions, meaning broader rising rate trends influence car financing costs. As the Federal Reserve raises benchmark rates to combat inflation, auto loans grow more expensive.
Rates on even excellent credit new car loans have climbed by over 2% in the last 18 months. With elevated inflation persisting for the foreseeable future, expect financing rates to increase further across all risk tiers.
Protect yourself from skyrocketing loan costs by:
- Locking rates 60-90 days before needing a car
- Making large down payments
- Shortening loan terms
- Boosting your credit score
This safeguards your deal against market volatility. Act sooner than later, as the Fed’s aggressive rate hikes have only begun.
Recognize Upside-Down Loan Risks
When you owe more on your car loan than the vehicle’s value, it’s considered “upside down” or “negative equity”. This often happens when buying newer cars that depreciate rapidly.
The first few years of payments mostly cover interest charges, not principle, so balances remain inflated. Meanwhile values plummet by 60-70% in just the initial 5 years of ownership.
This leads to several problems:
- You can’t trade it in or sell it without providing extra cash to pay down the balance to equal its lower value
- Insurance payouts in the event of a total loss will fall well short of what you still owe
- You’re stuck continuing to pay on an asset declining in value each year
To avoid owing more than it’s worth, limit loan terms to 5 years or less. While still not ideal, limiting negative equity improves your options later.
Prepare to Handle Financial Emergencies
Despite your best efforts mapping out an affordable monthly payment, unexpected hardships can still leave you unable to cover your auto loan. Prepare contingency plans for events like:
- Job loss
- Medical crisis
- Major home or auto repair
- Family changes
Backup options to know:
- Hardship deferment – Temporarily reduces or pauses payments for 1-2 months in a crisis. Interest still accrues.
- Loan modification – Makes permanent changes like extending maturity date or amending interest rates to sustainably lower payments long-term
- Refinancing – Gets a new loan with better terms to decrease payment
Most lenders want to help customers stay current on loans, so proactively communicating tough spots can reveal flexibility. Openness combined with a documented willingness to repay preserves options.
Improve Your Deal with Better Negotiation
Haggling may feel awkward or intimidating. But skillful negotiation leads to major savings when financing your next car.
Follow these proven tactics:
- Get competing dealer bids – Leverage their desire to beat each other’s prices. Tell each the best offer you’ve secured and ask them to beat it.
- Pitch your own interest rate – Start lower than their offer and negotiate up slowly to meet in the middle.
- Point out valid flaws lowering the car’s value – Small scratches, interior damage, high mileage, manual locks reduce resale value. Point these out to ask for a lower purchase price so you borrow less.
- Mention better rates advertised elsewhere – Even if slightly exaggerated, this may pressure them to offer unpublished discounts to earn your business.
Set pricing anchors, offer counters, and cite facts supporting your position to outmaneuver salespeople and get the lowest achievable deal.
Refinance If Your Credit Improves Later
Over the life of your loan, it’s possible for your credit profile and income to strengthen substantially. As this happens, companies eager to poach their competitors’ clients will flood your mailbox with refinance offers boasting lower rates.
If you receive offers over 2% less than your existing auto loan, take advantage! Refinancing can provide major savings, especially if your credit jumped 2+ tiers since origination. Crunch the numbers, but declines exceeding 1-2% merit strong consideration.
Savings multiply on higher loan balances. Even a 1% drop on a $30K loan saves over $1,200 in interest across a 5-year term.
So don’t just toss those refi offers – a brief application could slash thousands off your remaining auto loan expenses.
Scrutinize Lenders Offering Loans to Anyone
The allure of easy credit leads desperate buyers with poor finances to lenders peddling loans regardless of ability to repay. But handing money to someone unable to service more debt sustains their struggles rather than fixing them.
Steer clear of:
- Instant approvals without credit checks
- “No credit needed” offers
- Loans approved with no verified income
Reputable lenders analyze risk to align loan size with proven earnings power, credit management skills, and debt load. Approving unvetted applicants damages rather than helps.
If bad credit or income scarcity prevents traditional financing, address fundamentals first. Then revisit auto buying positioned for sustainable success. Jumping the gun with unaffordable high-risk loans causes financial catastrophe.
Patience, discipline, and prudent prioritization now prevent much pain later. The wait will be worthwhile.
Maximize Future Success With These Final Tips
Congratulations! With education on optimizing credit, expert negotiating techniques, and lender guidance, you now have all the tools needed to secure the absolute best financing on your next car.
As you begin this exciting process:
- Shop interest rates from at least 5 lenders
- Get pre-approved to strengthen your bargaining position
- Limit loan comparisons to 2 weeks to minimize credit impact
- Read all agreements carefully before signing
Stay focused on total interest cost rather than the monthly payment or APR alone. Doing excellent diligence on the front-end makes a dramatic difference in the quality and affordability of your loan.
Here’s wishing you the joy of upgraded transportation without the burden of financial stress! May your new ride carry you happily all the days ahead as you continue your quest for mastering wise money management. Our team at FinanceDevil looks forward to helping with future tips and guidance each step of the way!
Frequently Asked Questions
Here are some frequently asked questions about getting the best auto loan rate:
What’s the lowest auto loan rate I can qualify for?
The lowest rates go to borrowers with exceptional credit, significant down payments, and willingness to take shorter loan terms. In 2023, top-tier applicants may see rates around 3-5% for new cars and 4-6% for used. But your personal rate depends on your specific credit and financial profile.
Should I pay points to lower my interest rate?
Paying points means paying one-time fees upfront to receive a lower interest rate from the lender. Whether this makes financial sense depends on the size of your loan, how much the rate decreases, and how long you plan to keep the car. Calculate the “break even” point where paying points saves more money than they cost.
What credit score do most lenders require?
Thresholds vary between lenders, but here are general guidelines:
- Prime loans: 660+ credit score
- Subprime loans: 550-659 credit score
- Deep subprime: Below 550 credit score
Some specialized lenders work with borrowers having no credit score using alternative underwriting methods.
Should I stretch my budget to afford monthly payments?
This is risky. Car expenses like insurance, gas and repairs add to the payment, so overestimating affordability now creates financial stress later. Have honest conversations about budget tradeoffs needed to comfortably accommodate a car payment and associated costs. Wait until the numbers work sustainably before increasing obligations.
How do rising interest rates impact my auto loan APR?
Auto loan APRs track closely to benchmarks like the 10-year Treasury rate, which directly responds to Federal Reserve rate hikes. As the Fed boosts rates to fight inflation, financing vehicles becomes more expensive. Lock rates 60+ days before needing your next car to hedge against further increases.
What are the pros and cons of dealership financing?
Pros: One-stop shop, promotions with certain automakers, relationships with many lenders.
Cons: Approval is limited to in-network lenders, fewer competitive bidding on your loan, the possibility of rate markups.
Weigh all financing options both through dealers and external providers to secure the best terms for your situation. Let them bid against each other.
In another related article, What is an Auto Loans? Your Comprehensive Guide to Financing Your Dream Car